A nested barrier option that combines (also being a generalized double barrier option) a couple of pairs of barriers each of which is made up of a lower barrier and an upper barrier, forming a corridor or band around the initial spot price/ rate of the underlying.
In an onion option, there are multiple ranges around the initial spot price/ rate: inner, middle and outside. These ring-like corridors operate like barriers of a double barrier option. The barriers of a ring operate simultaneously where a respective corridor (ring) gets deactivated (knocked out) if and when either barrier is traded through by the underlying price or rate. Once a barrier is knocked-out it cannot be knocked-in again.
The option’s payoff is determined as a fixed amount similar to that of a binary option that is subject to a barrier mechanism. This amount depends on the range which the underlying price/ rate has existed over the course of the option’s life.
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