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Barrier options

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

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  1. Barrier options Wojciech Zielinski Jung, Joonyoung

  2. Table of contents • Barrier options • Examples of different barrier options • Example of call up out option • KIKO case

  3. 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

  4. Examples of diferent barrier options • Down and Out • Down and In • Up and Out • Up and In

  5. Example of call up out option Source: http://thismatter.com/money/options/exotic_options.htm

  6. 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…….

  7. Payoff for Korean Exporting Company Profit 890 950 1010 KRW/1USD

  8. KIKO: Knock In Knock Out Buy 1 PutK=960 Sell 2(3) CallK=1010 890 1010 950 960 Knock-Out Knock-In

  9. Payoff with KIKO contract Buy 1 Put + Sell 2(3) Call + Naked Position 890 950 1010 960 Knock-Out Knock-In

  10. KIKO 950 1010 890 960 KO KI

  11. Exchange Rate KRW/1USD Source : Paxnet

  12. KIKO KIKO payoff Short Strangle payoff 950 1010 890 960 KO KI

  13. 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

  14. KIKO • Why it happened • Optimistic expectation of Exchange Rate • SME’s relationship with banks • Explanation of the risks? • Insufficient understanding about hedge

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