In a barrier option,
A) Price paths are bounced off the barrier.
B) Option payoffs are conditional on whether the underlying breached the barrier during the option's life.
C) Option payoffs are conditional on when the underlying breached the barrier during the option's life.
D) Conditional on the barrier being breached during the option's life, option payoffs differ based on how many times the barrier was breached.

Question

Quizplus · Accepted Answer

In a barrier option, the option payoffs are conditional on whether the underlying breached the barrier during the option's life. If the barrier is breached, then the option will have a certain payoff, otherwise it will expire worthless. The price paths may or may not bounce off the barrier, but that is not a defining characteristic of a barrier option. The exact timing of when the barrier is breached may also be irrelevant, as the option payoff is often determined by whether the barrier is breached at all. The number of times the barrier is breached may or may not affect the option payoff, but that is not a defining characteristic of all barrier options.

In a Barrier Option