medium · FRM Part 1 Financial Markets and Products

What happens to the price of a 'down-and-out' call option as the barrier level B is moved closer to the current asset price S?

1. The price decreases because the probability of the option knocking out increases.
2. The price increases because the barrier provides a safety net.
3. The price becomes equal to the vanilla call.
4. The price stays the same as long as B < K.

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