Glossary

A knock-in option is a type of options contract that is not activated until a predetermined price is reached. The knock-in options contract is inactive until that price is reached. Knock-in options are one example of a barrier option: options contracts with earnings dependant on whether the underlying asset reaches a specific price level, referred to as the barrier price. In the case of a knock-in option, the barrier price must be achieved or surpassed before the option’s expiration in order to become active. There are two types of knock-in options:

• Down-and-in options, which are activated when the underlying asset’s price dips below the barrier price
• Up-and-in options, which are activated when the asset’s price rises above the barrier price

Knock-in options are mainly used in commodity and currency markets and can be traded over-the-counter. Premiums on these options are usually cheaper than regular options, but buyers run the risk of not realising any profits if the barrier price is not hit before expiration.