Knock-In

Definition

A Knock-In is a vanilla option that becomes alive (is "knocked-in") if the underlying spot breaches a predetermined barrier before maturity.

Barrier

For a regular Knock-In, the barrier is OTM, i.e., below the strike for a call and above the strike for a Put. For a reverse Knock-In (or "kick-in"), the barrier is ITM, i.e., above the strike for a call and below the strike for a Put.

Premium

The Knock-In premium is lower than that of a regular Vanilla option. The further away the barrier from spot, the lower the premium, as there is lower probability that the option will become alive before expiry.

Payoff

If the barrier is knocked-in, then the profile of a Knock-In option is the same as a regular Vanilla option. If the option is not knocked-in, the customer having a position in the underlying currency does not benefit from any FX hedge.