Which of the following describes a down-and-in call option?

Which of the following describes a down-and-in call option?

• A. It is void once a barrier is reached below the current price.
• B. It activates once a barrier is reached below the current price.
• C. It is a type of binary option.
• D. It has an expiration at a fixed date.

Answer: (B)

A down-and-in call option is a type of barrier option that becomes valid or "activates" once the underlying asset's price reaches a specified barrier level below the current market price. This means that if the asset price dips to the barrier level, the option can then be exercised as a regular call option, allowing the holder to buy the underlying asset at the strike price. This structure adds a layer of complexity, as the option is not available for trading or exercise until the barrier condition is met. The mechanism serves as a way to speculate on price movements under certain conditions while potentially reducing the premium paid for the option compared to a standard call option. The other options do not accurately capture the defining characteristics of a down-and-in call option. The concept of the option expiring at a fixed date typically applies to standard options, and while it can have an expiration, this characteristic alone does not define what a down-and-in call option is. Similarly, binary options refer to a different type of financial instrument and don't pertain directly to the features of down-and-in calls. The idea of being void once a barrier is reached is also incorrect, as it is the opposite; the down-and-in call specifically becomes active when the barrier is reached.

A down-and-in call option is a type of barrier option that becomes valid or "activates" once the underlying asset's price reaches a specified barrier level below the current market price. This means that if the asset price dips to the barrier level, the option can then be exercised as a regular call option, allowing the holder to buy the underlying asset at the strike price.

This structure adds a layer of complexity, as the option is not available for trading or exercise until the barrier condition is met. The mechanism serves as a way to speculate on price movements under certain conditions while potentially reducing the premium paid for the option compared to a standard call option.

The other options do not accurately capture the defining characteristics of a down-and-in call option. The concept of the option expiring at a fixed date typically applies to standard options, and while it can have an expiration, this characteristic alone does not define what a down-and-in call option is. Similarly, binary options refer to a different type of financial instrument and don't pertain directly to the features of down-and-in calls. The idea of being void once a barrier is reached is also incorrect, as it is the opposite; the down-and-in call specifically becomes active when the barrier is reached.