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Trigger condition

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Trigger condition
Path-dependent derivatives such as barrier options and binary options have payouts which depend in some way on a market variable satisfying a specific condition during the Derivative’s life. If this ‘Trigger condition’ is met, the Derivative may pay out immediately (early Exercise) or at some other specified time (such as expiry). Alternatively, the Option may only become effective (be knocked-in) or be de-activated (knocked out) when the Trigger condition is met.
The most common condition is that the Spot rate or price of the Underlying must breach a specified level, meaning that it must trade through the barrier, either from above or below. Many other Trigger conditions are possible, however. Some examples include:
¦¦the Spot must breach the Trigger, and remain above/below it for a specified time;
¦¦the Spot trades at the Trigger level at a specified time (eg, expiry) or at any time during the Option’s life;
¦¦the Spot trades within or breaks out of a Range (for example, Range binaries);
¦¦there is more than one Trigger level, with the payout conditional upon or increasing with the number of triggers activated and possibly the order in which they are activated (for example, a mini-Premium Option);
¦¦some combination of these.

See also barrier Option, Parisian barrier Option, Range binary
Posted by  Privatebanking.com
 
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