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Barrier options. Wojciech Zielinski Jung, Joonyoung. Table of contents. Barrier options Examples of different barrier options Example of call up out option K IKO case. Barrier Options. Nearly like European vanilla option Path-dependent
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Barrier options Wojciech Zielinski Jung, Joonyoung
Table of contents • Barrier options • Examples of different barrier options • Example of call up out option • KIKO case
Barrier Options • Nearly like European vanilla option • Path-dependent • knock-outs, knock-ins, kick-outs, kick-ins, ins, outs, exploding options, extinguishing options and trigger options • Cheper
Examples of diferent barrier options • Down and Out • Down and In • Up and Out • Up and In
Example of call up out option Source: http://thismatter.com/money/options/exotic_options.htm
Case : Korean KIKO failure • South Korean exporters face KIKO nightmare - Small and medium-sized companies in South Korea are suffering from a huge amount of losses from investing in KIKO options as the local currency moved opposite direction from their expectation, Korea Herald reported Friday. The South Korean Financial Supervisory Service said that 519 publicly-traded companies in the country that were involved in KIKO trading as of end of June are estimated to have lost 1.5 trillion won (1.25 billion US dollars) for holding the option…….
Payoff for Korean Exporting Company Profit 890 950 1010 KRW/1USD
KIKO: Knock In Knock Out Buy 1 PutK=960 Sell 2(3) CallK=1010 890 1010 950 960 Knock-Out Knock-In
Payoff with KIKO contract Buy 1 Put + Sell 2(3) Call + Naked Position 890 950 1010 960 Knock-Out Knock-In
KIKO 950 1010 890 960 KO KI
Exchange Rate KRW/1USD Source : Paxnet
KIKO KIKO payoff Short Strangle payoff 950 1010 890 960 KO KI
KIKO • Taesan LCD, inc • Kosdaq-listed manufacturer of TFT-LCD products • net profit of 11.4 billion won (9.5 million US dollars) in ½ yr of 2008 • due to the sharp depreciation of the won it incurred 80.6 billion won (67.2 billion US dollars) in KIKO-related losses during the same period which is equivalent to 129.1 percent of the firm's paid-in capital • Unable to make up for KIKO-related losses, the firm sought a corporate workout
KIKO • Why it happened • Optimistic expectation of Exchange Rate • SME’s relationship with banks • Explanation of the risks? • Insufficient understanding about hedge