ABSTRACT
A barrier option is a contract whose payoff depends on the event that the underlying price crosses a certain boundary. Typical variants of the barrier option depend only on the assets X and Y , and thus they can be regarded as contracts on two assets. Barrier options are cheaper than their corresponding plain vanilla counterparts. They may appeal to investors who want to have a higher exposure on the payoff of the plain vanilla option. Such investors may buy more units of the barrier option than the plain vanilla options for the same price, but with the risk that the barrier option may expire worthless in contrast to the plain vanilla option. Barrier options typically appear in foreign exchange markets.
