Barrier Option

A barrier option is a type of exotic derivative contract whose payoff depends on whether the price of the underlying asset crosses a pre-defined price level — called the barrier — during the life of the option. If the barrier is breached, the option either activates (knock-in) or ceases to exist (knock-out). For example, a down-and-out call option on Nifty 50 will expire worthless if the index falls below a specified level before expiry, even if it recovers above the strike by settlement. Barrier options are cheaper than standard vanilla options because the protection they offer is conditional. They are widely used in structured products and currency hedging strategies by institutional participants in India's OTC derivatives market.