Reverse Barrier Option

A type of exotic option in which the barrier feature activates or cancels the option only when it is already in-the-money, that is, when the option would otherwise be profitable. Reverse barrier options are designed to either extinguish (knock-out) or bring into effect (knock-in) the contract once a certain market condition is met after profitability has been achieved. 

This structure introduces a conditional trigger that depends on both the option’s intrinsic value and the barrier level being breached. It is used to create tailored payoff profiles for advanced hedging or speculative strategies, typically in FX and interest rate derivatives markets. 

For example, a company might hold a reverse knock-out call option on EUR/USD with a strike of 1.1000 and a barrier at 1.1300. If EUR/USD rises above 1.1000 (making the option profitable) and later touches 1.1300, the option is canceled, despite being in the money. This setup limits potential upside while offering cheaper premiums than standard options. 

Reverse barrier options are sensitive to volatility, timing, and proximity to both the strike and barrier levels. While they can reduce hedging costs, they also introduce complexity and the risk of losing coverage at precisely the moment it is most needed. As such, they require careful structuring and ongoing monitoring within a risk management framework.