DEFINITION of 'Rebate Barrier Option'
A financial derivative product that will automatically expire if the underlying asset reaches a certain price, at which time the option holder would be refunded a certain portion of any premium paid. A barrier option is a type of exotic option contract that can be exercised only if the underlying asset reaches a predetermined barrier price.
A barrier option can either be "knock-in," where the contract is exercised if the underlying asset rises above, or drops below (depending on terms), the specified barrier price, or "knock-out," where the contract automatically expires if the underlying asset rises above, or drops below, the barrier price.
BREAKING DOWN 'Rebate Barrier Option'
Options contracts give the holder the right, but not the obligation, to buy or sell a financial asset at an agreed-upon price at, or before, a certain specified date in the future. A rebate barrier option is a knock-out option that provides a refund in the event the knock-out occurs. Since the rebate diminishes the option writer's profits, this type of exotic option is not common.