Exotic options take effect or are terminated when a
certain price level (barrier) is reached.
There are two types of barrier rates:
knock-in and knock-out. If the market price reaches the knock-in level, the
option takes effect, and at the knock-out level, on the contrary, the option is
terminated.
Example transaction for selling a call option with an activation (knock-in) level
| Transaction parameters | |
|---|---|
| Duration | 6 months |
| Currency pair | EUR/HUF |
| Amount | EUR 500,000 |
| Spot rate EUR/HUF at the time of pricing | 329.00 (Reuters: EURHUF=D3) |
| Strike | 332.00 |
| Knock-in | 340.00 |
| Volume-based option premium in fillér | 250 |
| Option premium expressed in HUF | HUF 1,250,000 |
- Transaction parametersTransaction parameters
- Duration6 months
- Currency pairEUR/HUF
- AmountEUR 500,000
- Spot rate EUR/HUF at the time of pricing329.00 (Reuters: EURHUF=D3)
- Strike332.00
- Knock-in340.00
- Volume-based option premium in fillér250
- Option premium expressed in HUFHUF 1,250,000
Possible outcomes
- The EUR/HUF exchange rate does not reach the
340 level during the term
- the option does not take effect, no obligation arises from the transaction -> result: HUF 1,250,000
- The EUR/HUF exchange rate reaches the 340
level during the term
- the option is activated if the EUR/HUF exchange rate is above the strike rate of 332 at the time of exercise, with an exchange rate of 332 you have an obligation to sell -> result: (strike rate - current EUR/HUF market rate) * nominal value of the option + HUF 1,250,000
- the option is activated, if the EUR/HUF exchange rate is below the strike rate of 332 at the time of exercise, the option is not exercised, so no obligation arises from it -> result: + HUF 1,250,000
Example transaction for selling a call option with a termination (knock-out) level
| Transaction parameters | |
|---|---|
| Duration | 6 months |
| Currency pair | EUR/HUF |
| Amount | EUR 500,000 |
| Spot rate EUR/HUF at the time of pricing | 329.00 (Reuters: EURHUF=D3) |
| Strike | 332.00 |
| Knock-out | 327.00 |
| Volume-based option premium in fillér | 125 |
| Option premium expressed in HUF | HUF 625,000 |
- Transaction parametersTransaction parameters
- Duration6 months
- Currency pairEUR/HUF
- AmountEUR 500,000
- Spot rate EUR/HUF at the time of pricing329.00 (Reuters: EURHUF=D3)
- Strike332.00
- Knock-out327.00
- Volume-based option premium in fillér125
- Option premium expressed in HUFHUF 625,000
Possible outcomes
- The EUR/HUF exchange rate reaches the level of 327 during the term
- the option expires, so no liability arises from it -> result: + HUF 625,000
- The EUR/HUF exchange rate does not reach the 327
level during the term
- the option does not expire or terminate. If the EUR/HUF exchange rate is above the strike rate of 332 at the time of exercise, with an exchange rate of 332 you have an obligation to sell -> result: (strike rate - current EUR/HUF market rate) * nominal value of the option + HUF 625,000
- the option does not expire or terminate. If the EUR/HUF exchange rate is below the strike rate of 332 at the time of exercise, the option is not exercised, so there is no liability -> profit: + HUF 625,000
Benefits
- Compared to the plain vanilla option, the option is less likely to be called up due to the barrier level.
- When a knock-out option is sold, the liability (and thus the deposit requirement) may be terminated well before expiry.
Risks
- A more complex product compared to plain vanilla options.
Experts
If you would like to become a client of OTP Global Markets, feel free to
contact us.
Zsigmond Csillag
Head of Department
Frigyes Soós
Sales
Budapest
Balázs Péntek
Sales
North Transdanubia region and Budapest
Botond Varga
Sales
South Transdanubia region and Budapest
Tamás Szabó
Sales
Northeast region and Budapest
Csaba Szemán
Sales
Southern Great Plain region and Budapest
Csinszka Kis-Böndi
Sales
Budapest
Krisztian Tóth
Sales
Budapest
Ottó Izbéki
Sales
Equity Specialist
Sándor Andrási
Sales
Equity Specialist
Bálint Torda
Sales
Equity Specialist
Useful documents
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Information on the suspension of the market making obligation (available only in Hungarian)
Cross-Currency Interest rate swap
Dual currency structured investment
Forward deal in precious metals (gold and silver) transaction
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