How Touch and No-Touch Barriers Determine Exotic Option Payoffs
Summary
The discussion explains how a contract combining one touch barrier with one no-touch barrier can pay, using upper and lower barriers as an example. A one-touch feature generally triggers a payout when its barrier is reached, while a no-touch feature can invalidate the payout if its barrier is reached during the observation period. Some contracts pay at the touch; others pay at expiry, as specified in the term sheet.
The answers describe different logical structures. With an “or” condition, either specified event may be enough for payment; with an “and” condition, the option may require reaching the upper barrier while avoiding the lower one through the relevant observation period. It may also be possible to observe the no-touch condition only after the one-touch event. These distinctions mean the label alone does not establish the payoff: the precise barrier logic, observation timing, and payment timing must be checked in the contract terms.
Key ideas
- A one-touch feature can trigger a payout when its barrier is reached.
- A no-touch feature can make the option worthless if its barrier is reached during observation.
- The combined payoff depends on whether the conditions are joined by an either-or or both-required rule.
- Payment may occur at the barrier touch or at expiry, depending on the term sheet.
- Some contracts begin observing the no-touch condition only after the one-touch event.
Tags
Full text
# One touch UP no touch DOWN, One touch DOWN no touch UP # One touch UP no touch DOWN, One touch DOWN no touch UP I was reading about exotic options and I came across something new. One touch down no touch up option and the other one I saw was One touch up no touch down option. I would like to understand how it works. Does it payout when the barrier is touched or on the expiration date of the option? A regular one-touch option pays after the specified barrier is touched no matter how much time is left to the expiration, but a no touch option is also part of the options above so I am not sure how this is going to work? An Example for the One touch up no touch down option, If the upper barrier is at 110 and the current price is 100 and a lower barrier is at 90. What happens if the price goes to i.) 90? ii.) 110? iii.) Stay between 90 and 110? ## Answer by Peter A (score 1, accepted) https://quant.stackexchange.com/a/65497 Usually, it pays cash upon touching the knock-in barrier as long as the knock-out barrier has not touched first ## Answer by AKdemy (score 0) https://quant.stackexchange.com/a/65492 Shouldn't the payoff be explained wherever you read about them? The or in your example implies that either event is sufficient. So in your example, if S>110, done and you get paid (usually paid at hit or paid at expiry is a choice and defined in the term sheet). If that doesn't happen, if you never touch the down, you would still get paid at end (as this needs to be observed until end for no touch. However, term sheets come in all sorts of flavours in my experience. A regular one touch doesn't cease to exist.it actually pays if it touches. A no touch means it becomes worthless (ceases). When you get paid is subject to the term sheet. Can be at touch or at expiry for a one touch. A double no-touch pays if the rate does not move beyond either of the two barriers. Here it is one no touch and one touch. On top of the or, you could have and. This means it cannot touch the down barrier and must touch the up barrier. Hence you need to wait until the end as it could still reach the no touch and make it worthless even if it already touched. So if below 90, nothing, between, nothing, above 110 (provided it never went below 90), you get payoff. Generally, that could also be sequentially (meaning if one touch occured, start to observe no touch).
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