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One Touch Binary Option is a contract which pays a fixed amount if the price of the underlying asset goes through a pre-specified barrier at any time before the expiration of the contract. If the barrier breach happens, the payment is made either at expiration (delayed settlement) or shortly after the barrier breach (immediate settlement).

One touches are closely related to knockout options and represent the rebate that the equivalent knockout option pays in the event of knockout. Even though the contractual provisions of one touches look simple, their pricing is far from trivial. Typically, the barrier is set far from the current underlying price and much depends on how the underlying volatility changes between now and the time the underlying asset gets close to the barrier. For that reason, understanding the underlying volatility surface is essential. In particular one touch pricing is highly sensitive to the volatility skew.

One touches are especially liquid in the world of foreign exchange. Together with vanilla options and knockouts, they represent the market data to which the volatility surface is calibrated on real-time basis. The calibration is done for combinations of standard strikes and tenors, separately for each underlying currency cross. Some trading desks are known to pay specific attention to one touches when calibrating risk reversals... As the next step, the volatility surface is interpolated for non-standard strikes and tenors, still separately for each cross. Finally, the volatility surfaces are used for pricing more complex and truly exotic derivative products.

One touches are traded over the counter (OTC). If you are a small hedge fund, most prime brokers will allow you to trade one touches and will do the clearing and back office operations for you. For the list of top prime brokers please refer to the link below.


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