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?
- The price decreases because the probability of the option knocking out increases.
- The price rises since a nearer barrier acts as a cheap safety net for holders.
- The price converges toward that of the equivalent vanilla call as B nears zero.
- The price is unaffected by B whenever the barrier sits below the strike price K.
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