Consider a down-and-out call and a down-and-in call with a current stock price $S$ , barrier $H H$ . When does the knock-out option increase in price and the knock-in decrease in price? A) When the stock price increases. B) When the volatility increases. C) When the barrier increases. D) When the strike increases.

Question

Consider a down-and-out call and a down-and-in call with a current stock price $S$ , barrier $H < S$ , and strike $K > H$ . When does the knock-out option increase in price and the knock-in decrease in price?
A) When the stock price increases.
B) When the volatility increases.
C) When the barrier increases.
D) When the strike increases.

Quizplus · Accepted Answer

When the stock price increases, the down-and-out call option increases in price because it becomes less likely that the option will hit the barrier and become worthless. Conversely, the down-and-in call option decreases in price because it becomes less likely to be activated.

Consider a Down-And-Out Call and a Down-And-In Call with a Current