A barrier option is a type of financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, known as the strike price. However, unlike traditional options, barrier options have an additional feature that sets a specific price level or "barrier," which, if reached, can activate or deactivate the option. This barrier can be either a "knock-in" or "knock-out" level, which determines if the option is triggered or nullified. Barrier options are often used by traders as a way to limit their risk exposure or take advantage of specific market conditions.

A barrier option is a financial derivative that derives its value from the underlying asset and possesses a distinctive feature known as a barrier. This option type comes with predetermined trigger levels, and its payoff depends on whether the underlying asset's price crosses these barriers during the option's lifetime. Barrier options can be classified into two main types: knock-in and knock-out. In a knock-in barrier option, the contract becomes active or "knocks in" only if the underlying asset's price reaches a specified barrier level. Conversely, a knock-out barrier option ceases to exist or "knocks out" if the underlying asset's price hits a predefined barrier. These options offer risk management advantages and cater to investors seeking customizable strategies to align with market expectations, making them a valuable tool in the complex landscape of financial markets.