A barrier option in which the barrier is not a single level but a soft range bounded by an upper level and a lower level. Soft barrier options are typically knocked in or out proportionately, i.e., in proportion to the part of the range that has not been hit by the current price of a respective underlying. For example, assume a soft down-and-in call option with an underlying currently priced at 50, and where the soft barrier is within a range of 40-45. If the lowest level at which the underlying has traded is 42, then 60% of the call will be knocked in. In this respect, the value of a soft down-and-in call is equal to the value of an ordinary call minus the value of a soft down-and-out call on the same underlying and fore the same strike price and expiration date. Likewise, the value of a soft down-and-in put is equal to the value of an ordinary put minus the value of a soft down-and-out put on the same underlying and for the same strike price and expiration date.
[http://www.investment-and-finance.net/derivatives/s/soft-barrier-option.html]
Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University
