A double barrier option that is embedded with a delayed knockout mechanism. The option knocks out when the occupation time outside of the range (defined by the double barrier) exceeds a pre-specified knock-out window. For example, a four-month option may come with a knock-out window of ten days, whereby it knocks out in its entirety after ten days spent outside of the range/ corridor. A delayed double barrier option provides a mechanism for mitigation and hedging of the so-called discrete barrier event risk.
From the option buyer’s perspective, this option provides a “no-regret”alternative to its standard form (the double-barrier contract). From the option seller’s perspective, this option helps alleviate the problem of discontinuous and unbounded delta that makes hedging of double-barrier options very much complicated. In general, hedging occupation time-based options is easier than hard barrier options.
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