Key product features
Participate in a favourable move in the underlying exchange rate once a predetermined spot rate called the barrier level has been reached or breached.
Barrier level can be ITM or OTM.
Upfront premium.
Product description/scenario
A Knock-In Call or Put is a modification to the Vanilla that only starts to exist if spot trades at or beyond a pre-specified barrier level.
The option is cheaper than an equivalent Vanilla, as the ability to exercise the option is contingent on spot fixing at or beyond the barrier first.
A Knock-In with a barrier that is In-The-Money is called a Reverse Knock-In, shown in the trade profile below.
A Knock-In with a barrier that is Out-The-Money is called a Normal or Regular Knock-In.
Example trade profile
Payout profile at expiry
Payoff description
If spot has reached or breached the knock-in level (1.4500) and spot at expiry is:
Above the strike (1.3500), you buy EUR 1mio, sells USD 1.35mio.
Below strike (1.3500), you are free to trade at the prevailing market spot rate.
If spot has not reached or breached the knock-in level (1.4500) at any time throughout the life of the option, the option expires without ever having come into existence.
Variations
European style:
The barrier is live only at expiry.
Discrete style:
The barrier is live for predetermined discrete points in time during the life of the option.