FX Touch Option

Table of Contents

An FX touch option is a pure bet on a rate touching a level. It has no strike optionality beyond that event. ORE models it with the trade type FxTouchOption. This note records the domain grounding, as ORE documents it in its product catalogue.

1. Identifiers

What a trader books it as, and what to grep for. The codes are the trade type catalogue's, which is what the database enforces.

Field Value
Full name FX Touch Option
Short name FX Touch Option
ORE Studio product code FxTouchOption
Asset class fx
Family Option
ORE trade data node FxTouchOptionData
ORE documentation fx_touchoption.tex

2. Summary

An FX touch option combines a continuously monitored single barrier with a cash-or-nothing digital underlying. At expiry it pays a fixed amount or zero, depending on whether the spot rate reached the barrier. The four main barrier types apply. A knock-in, or one-touch, pays if the barrier is breached. A knock-out, or no-touch, pays if it is not. No rebates are supported.

3. Detail

3.1. What it is

ORE defines the product as follows:

This product has a continuously monitored single barrier with a Cash-or-Nothing digital underlying.

Source: ORE User Guide, Products catalogue, fx_touchoption.tex.

ORE states the payoff condition as follows:

At expiry a FX Touch Option pays either a fixed predetermined payoff amount or zero (Cash-or-Nothing) depending upon an FX spot rate reaching a pre-set barrier level.

Source: ORE User Guide, Products catalogue, fx_touchoption.tex.

ORE also states the two forms. A knock-in, or one-touch, has a fixed payout if the barrier is breached, and no payout otherwise. The payout can be at expiry or at hit. A knock-out, or no-touch, has no payout if the barrier is breached, and a fixed payout at expiry otherwise. The buyer pays a premium to the seller.

3.2. In plain terms

An FX touch option is a bet on a single touch. One side bets that the rate touches a level before expiry. The other side bets that it never does. The payout is fixed. The level, not the strike, is the whole game.

3.3. How it works in ORE

The FxTouchOptionData node includes one OptionData node and one BarrierData node. The OptionType is not required. It is inferred from the barrier type, call for an up barrier and put for a down barrier. The barrier Type is one of the four main types. Levels holds the level. PayoffAmount and PayoffCurrency set the fixed payout. ForeignCurrency and DomesticCurrency name the rate. StartDate sets the monitoring start, with the Calendar and FXIndex naming the fixing source.

3.4. Mathematical notes

The value is the probability of the touch event, discounted, times the fixed payout. A one-touch pays when the rate breaches the barrier at any time before expiry. A no-touch pays when it never breaches. The touch probability rises with volatility and with time. A payout at hit settles earlier than a payout at expiry.

3.5. What moves its value (static sensitivities)

  • The FX spot rate. Its distance from the barrier sets the state.
  • The volatility of the pair. It drives the touch probability.
  • The interest rates in the two currencies.
  • The barrier level and the fixed payout.
  • The payout timing, at expiry or at hit.

A no-touch loses value as spot approaches the barrier. A one-touch gains. Near the barrier the delta and vega change direction.

3.6. How the profile ages (dynamic sensitivities)

The barrier is monitored continuously. A one-touch can be decided at any moment, with the payout at hit or at expiry. A no-touch stays alive while spot stays away from the level. As expiry approaches, the remaining time to touch shrinks. At expiry the payout settles and the trade stops.

3.7. Why a customer would want it

A customer who expects the rate to stay below a level sells a no-touch and collects the premium. A customer who expects a move buys a one-touch. The products express a pure range view. In ORE Studio a customer books FX touch options to value them and run sensitivities on the ORE engine.

3.8. Example

ORE's catalogue shows a long no-touch on dollar-yen: 

<FxTouchOptionData>
  <OptionData>
    <LongShort>Long</LongShort>
    <PayOffAtExpiry>true</PayOffAtExpiry>
    <ExerciseDates>
      <ExerciseDate>2021-12-14</ExerciseDate>
    </ExerciseDates>
    ...
  </OptionData>
  <BarrierData>
    <Type>DownAndOut</Type>
    <Levels>
      <Level>0.009</Level>
    </Levels>
  </BarrierData>
  <ForeignCurrency>JPY</ForeignCurrency>
  <DomesticCurrency>USD</DomesticCurrency>
  <PayoffCurrency>USD</PayoffCurrency>
  <PayoffAmount>100000</PayoffAmount>
  <StartDate>2019-01-25</StartDate>
  <FXIndex>FX-TR20H-USD-JPY</FXIndex>
  <Calendar>NYB,TKB</Calendar>
</FxTouchOptionData>

Source: ORE User Guide, Products catalogue, fx_touchoption.tex, listing FX Touch Option data (optional elements omitted).

The two-level form is the FX Double Touch Option.

4. See also

Emacs 29.3 (Org mode 9.6.15)