M6A — CM-SIP: Specified Investment Products (Derivatives and CIS)
Barrier Options, Binary Options and Callable Contracts
Chapter 6 covers the exotic building blocks hidden inside many structured products. Barrier options switch on or off when a price level is touched; binary (digital) options pay all or nothing; callable contracts end early, either at the issuer's choice or automatically when a price condition is met, as with callable bull/bear contracts (CBBCs). The exam tests path-dependent payoffs, in-out parity, how volatility and barrier distance change value, CBBC residual value, and the reinvestment risk of callable deposits.
6 sections·~3 min read
✓Checked against the IBF CMFAS CM-SIP syllabus chapter 6; IBF CM-SIP Summary of Updates Jan 2026 v1.1 (Case Study 12.5, double no-touch and digital option spread); HKEX Callable Bull/Bear Contracts FAQ; SGX DLC FAQ (1 Nov 2018) on knock-out products; MoneySense 'Understanding structured deposits'; checked 13 Sep 2026. Unofficial prep, not endorsed by MAS or IBF.
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Must-know for the exam
✓Knock-out: live until the barrier is touched, then extinguished. Knock-in: dormant until the barrier is touched, then a vanilla option.
✓Name = barrier position + effect: up-and-out call (barrier above spot, dies on a rise); down-and-in put (barrier below spot, activates on a fall).
✓In-out parity (no rebate): knock-in + knock-out = vanilla. Vanilla put $5.00, down-and-out $1.80, so down-and-in = $3.20.
✓Barrier options are cheaper than vanilla options. Continuous monitoring makes a barrier event more likely than daily-close monitoring.
✓Higher volatility can reduce a knock-out's value near its barrier; it raises a knock-in's value.
✓Binary payoffs: cash-or-nothing pays a fixed amount; asset-or-nothing pays the asset value; one-touch pays if a level is reached; no-touch and double no-touch pay if never reached.
✓Cash-or-nothing value is about payout x probability of paying, discounted. Cash-or-nothing call + put (same strike) = present value of the payout.
✓IBF case study 12.5: narrowing or skewing the range, or cutting the minimum yield, makes a range or double no-touch structure cheaper; widening the range or shortening the tenor makes it dearer.
✓CBBC (HKEX): bull call price at or above strike, bear at or below. Mandatory call event when the underlying reaches the call price during the observation period; trading ends and does not revive.
✓Category N: call price = strike, no residual value. Category R: residual value = (lowest price in valuation period - strike) / entitlement ratio for bulls; (strike - highest price) / ratio for bears; zero if negative.
✓CBBC funding cost declines to zero at maturity; implied volatility impact is insignificant compared with warrants.
✓Callable deposits and notes pay more because the investor has sold a call to the issuer; the cost is reinvestment risk when rates fall (MoneySense).
Why this matters in the exam
•Structured deposits, notes and accumulators are built from barriers and digitals. Case studies ask you to trace a price path, decide whether a barrier was touched, and explain why a structure pays a high headline yield. Most errors come from checking only the final price.
Barrier options
•Up-and-out call, strike 100, barrier 120: high of 118, close 115, pays 15. Touch 121, close 115, pays 0 (or the rebate).
•Down-and-in put, strike 100, barrier 80: low of 78, close 90, pays 10. Low of 82, close 85, pays 0.
•Reverse knock-out: the barrier sits where the option is in the money (up-and-out call), so it dies just as it gains value.
•Rebate: a fixed amount paid when a knock-out is extinguished or a knock-in never activates.
•Uses: a knock-in put sold by the investor funds the coupon in equity-linked notes; an up-and-out call with a rebate is the core of a shark-fin note; accumulators knock out on a rally, capping gains, while falls below the strike keep the client buying.
•Trap: a down-and-out put is cheap protection that vanishes in a crash through the barrier. For crash-only protection, a down-and-in put activates exactly when needed.
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