Four-Barrier Options Through Layered Each-Way Tunnels

Summary

The document describes how a four-barrier payoff can be constructed by layering two double-barrier options. A standard double no-touch option pays a fixed amount if the underlying remains between an upper and a lower barrier throughout its life, and pays nothing if either barrier is hit. The response treats this as an inner barrier structure and adds a second, wider outer range.

Under the proposed payoff, staying inside the inner range earns the full payout; touching an inner barrier but avoiding both outer barriers earns half; touching an outer barrier eliminates the payout. This structure is identified as an Eachway Tunnel. The explanation is conceptual and gives no valuation formula, assumptions about the underlying price process, or discussion of how the contract handles barrier monitoring, expiry, or market conditions, so it is not a complete specification for pricing or trading.

Key ideas

• A double no-touch option pays only if the underlying avoids both barriers during the option’s life.
• A four-barrier structure can combine an inner range with a wider outer range.
• The described Eachway Tunnel pays fully inside the inner range, partially in the space between inner and outer barriers, and nothing after an outer barrier is hit.
• Pricing requires additional contract and modeling details that the document does not provide.

Tags

# Double no touch option with four barriers


# Double no touch option with four barriers












The double no touch (also known as a range binary) is an option with two American barriers. You define one barrier above the underlying asset and one below it.

If during the option's lifetime the underlying asset:

Remains within the defined range (i.e., neither of the barriers is hit), the payout is activated. That is, the buyer of the option receives the fixed payout specified in the option on the option's delivery date in the base currency. Hits either of the two barriers, there is be no payout.

Can anyone explain about double no touch option with two barriers above the underlying asset and two below it and the assumptions. I'm very new to this field. TQ

## Answer by rajah9 (score 1)

https://quant.stackexchange.com/a/22389

You could have four barriers by using an Eachway Tunnel.

Your first three paragraphs are describing a down-and-out plus an up-and-out exotic option with two barriers. Let's call this the inner option.

Now add a layer with an outer option (with a higher and lower barrier, perhaps with the same center as the inner option).

Here you would have a full payout if the price never touches the first barrier, half payout if it touches either inner barrier, and no payout if it touches either outer barrier.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.