8.5.2.1 Fx Barrier Feature

The 4.x FX barrier option model extended fx option product with spot rate, fx barrier and trigger payout. As part of the refactoring work, Asian and/or Barrier represented as a new features to the FxOption and not as separate products. An fxOption with barrier features - a conventional option except that it is changed in a predetermined way when the underlying trades at predetermined barrier levels. Foreign exchange barrier features defines the level and the condition for activation. A knock-in option pays nothing at expiry unless at some point in its life the underlying reaches a pre-set barrier and brings the option to life as a standard call or put. A knock-out option is a conventional option until the price of the underlying reaches a pre-set barrier price, in which case it is extinguished and ceases to exist. Barrier options have both a strike price and a barrier price.

The Barrier structure has been refactored in FpML 5.5 to support the correct definition of simple barrier products. The refactored structure provides an additional direction element following the barrierType. This would be an enumeration with values 'Up' and 'Down'. In addition it deprecates the use of the existing enumerable values: 'ReverseKnockin' and 'ReverseKnockout'; only 'Knockin', and 'Knockout' are necessary. In making the directional quality of a barrier separate from its in/out quality, we follow the approach taken in the Swift confirmation message format, and the confirmation templates in the 2005 ISDA FX Barrier Options Supplemental Definitions. Taking this approach also has the advantage that it is least disruptive to the existing schema.

The present observationStartDate and obervationEndDate elements provide the ability to describe, full barrier, forward barrier, partial barrier or window barrier options. In addition to the dates, the MT306 and the ISDA confirmation templates require the specification of the start and end times for a barrier in terms of the business center and time. In order to remain backwardly compatible with the present definitions, in FpML-5-5, the provision of start date times and end date times is added optionally, and if start date and end date are provided, observationStartTime and observationEndTime remain optional.

MT306: An MT306 barrier block will specify the end location and time and is always mandatory. In the case of the start time, the location is mandatory and time is optional. If no time is specified this implies that the barrier starts at the execution date time. The optionality of the start date is a concession to the fact that the exact time of execution is subjective and frequently unrecorded; and certainly should not be a matching field on a confirmation.

				Additional Conditions	:BRUP
				____________________________________________________________
				Barrier Block
				
				Type of Barrier	:SKOT
				Barrier Level	:1.5000000000
				____________________________________________________________
				Barrier Window Block
				
				Start Date	:Aug 11, 2011
				Location and Time	:USNY
				End Date	:Aug 13, 2012
				Location and Time	:USNY 10:00
				____________________________________________________________
				 

ISDA FX Barrier Options Supplemental Definitions 2005:The confirmation templates within the ISDA definitions provide, for example, in the Barrier Option template at Page 10:

				[Event Period Start Date and Time: [ ] at [ ] [a.m./p.m.] (local time in [ ]]23
				Event Period End Date and Time: [ ] at [ ] [a.m./p.m.] (local time in [ ]24]25
				
				23 Because the Trade Date is the most common Event Period Start Date for a Barrier Option Type, Section
				3.9(i) of this Supplement contains a presumption that, unless otherwise specified, the Event Period Start
				Date and Time is the Trade Date at the time the Transaction was entered into. Parties should specify the
				Event Period Start Date and Time if they wish to modify this presumption.
				
				24 Parties should include Event Period End Date and Time if they wish to modify the presumption in Section
				3.9(h) of this Supplement that the Event Period End Date and Time are the Expiration Date at the
				Expiration Time. Nonetheless, for an at-expiration Currency Option Transaction, parties may wish to
				specify that the Event Period End Date and Time are the Expiration Time on the Expiration Date.
				
				25 Event Period Start Date and Time and Event Period End Date and Time may be specified for any Barrier
				

American Barriers are represented using the observationStartXxxx and observationEndXxxx elements.

European Barriers are represented by providing a single observationPoint element, with the date equivalent to the trade expiry date as defined in the fxOption/EuropeanExercise or American Exercise elements, and the time either equivalent to the expiry time, or omitted.

Discrete Barriers are not supported by MT306, but a new structure added in FpML 5.5. will support them. Discrete Barriers would be represented by providing a collection of observationPoint elements, with individual observation times.

barrierType-This specifies whether the option becomes effective ("knock-in") or is annulled ("knock-out") when the respective barrier event occurs. Note: only 'Knockin', and 'Knockout' are necessary; 'ReverseKnockin' and 'ReverseKnockout' are DEPRECATED. direction-This specifies whether the barrier direction is "Up" or "Down"; that is, that a barrier event occurs if the spot rate is at or above the trigger rate, or at or below the trigger rate during the period of observation of an american barrier, or at the times of observation of a discrete or european barrier. quotedCurrencyPair-Defines the two currencies for an FX trade and the quotation relationship between the two currencies. triggerRate-The market rate is observed relative to the trigger rate, and if it is found to be on the predefined side of (above or below) the trigger rate, a trigger event is deemed to have occurred. informationSource-The information source where a published or displayed market rate will be obtained, e.g. Telerate Page 3750. observationStartDate-The date on which the observation period for an american barrier starts. If the start date is not present, then the date and time of the start of the period is deemed to be the date and time the transaction was entered into. observationStartTime-The time on the start date at which the observation period for an american barrier starts. If the time is not present and the start date is equivalent to the transaction date, the time is deemed to be the time the transaction was entered into. If the time is not present and the start date is other than the transaction date, then the time is deemed to be the same as the expiration time. observationEndDate-The date on which the observation period for an american barrier ends. If the end date is not present, then the date and time of the end of the period is deemed to be the date and time of expiration. observationEndTime-The time on the end date at which the observation period for an american barrier ends. If the time is not present, then the time is deemed to be the same as the expiration time. observationPoint-The dates and times at which rate observations are made to determine whether a barrier event has occurred for a discrete or european barrier. If the time is not present then the time is deemed to be the same as the expiration time.

The FpML schema envisages that a double barrier product would be described using two of these barrier elements.

The FpML schema provides for the definition of the Barrier Determination Agent. The Barrier Determination Agent is a definition of the contract in a similar way to the Calculation Agent. The 'barrierDeterminationAgent' reference therefore reside as a child of the trade element in a similar way to the Calculation Agent.

The usage is:

				<trade>
				  <tradeHeader>…</tradeHeader>
				  <fxOption>…</fxOption>
				  …
				  <barrierDeterminationAgent href="Party1"/>
				</trade>
				
				<party id="Party1">
				  <partyId>LEI</partyId>
				  <!-- Other Party Information -->
				</party>
				

8.5.2.2 Fx Asian Feature

Foreign exchange asian features - (sometimes referred to as asian or average rate) captures the parameters for the average rate calculation. FxOption with asian feature is an option whose payout is based upon the average of the price of the underlying, typically (but not necessarily) over the life of the option. These options are popular because they are usually cheaper than conventional options because the averaging process over time reduces volatility.

FxAsianFeature includes a FX rateObservation component, a collection of specific observation dates, accompanied by a specific weighting factor and average rate options on occasion when struck already have agreed-upon rate observations in the past. FX rateObservation can be produced either as an independent representation of a series of specific observation dates, or to supplement the parametric representation of the observationSchedule (e.g., daily, 2nd Friday, etc.), utilizing the same rolling convention schemes as utilized within the interest rate derivatives area. The model is constructed as an “at-least-one-of” model which enforces the existence of observationSchedule, or rateObservation, or both. Below are the structures for an FX OTC asian feature.

The rateObservation collection is optionally accompanied by a rateObservationQuoteBasis, allowing this to be made explicit.

The following diagram shows a graphical view of a collection of specific observation dates, accompanied by a specific weighting factor and average rate options:

Where the observation schedule is represented parametrically, the rateObservation series may be absent, or limited to observations which have already occurred – but now the observed rate values are accompanied by their weighting factor:

A combination of an average rate and one or more barrier are supported.