A: I usually refer to barriers (exotic options) generically because the incentives for the players are similar, but perhaps reversed.
Many of the exotics we hear about are part of a double-no-touch (DNT) structure which pays the owner a a multiple of his premium if prices stay within the proscribed parameters during the life of the option.
For arguments sake, let’s say there is a 1.2750/1.3750 DNT, the owner of the option wants to keep prices within that range while and may sell EUR/USD to protect 1.3750. The bank that sold the option will want to push prices out of the range to avoid having to pay-out on the options structure.
In the case of a knock-in, the incentives are reversed. The owner of the option will try and push prices through the knock-in while the seller will try and prevent prices from exceeding the strike.
So, in general, unless we know all the parameters of the options structure, we just report that there is a barrier at a particular strike because one part to the trade will want it higher and the other will want it lower…as observers, the details don’t make much difference.
