What defines a knock-in option?

A knock-in option is defined as an option that is created or comes into existence only when the underlying asset's price reaches a specific barrier level, known as the knock-in barrier. This means that for the option to be active, the spot exchange rate or price of the underlying asset must reach or breach the predetermined level. If this condition is met, the option "knocks in" and becomes valid, allowing the holder to exercise it under the specified terms.

The definition corresponds closely to the characteristics of a knock-in option, making it essential for investors to monitor the underlying asset closely and understand how the barrier works to determine whether the option will be activated or not. This feature introduces unique risk and opportunity profiles compared to traditional options.

The other choices do not accurately define a knock-in option. For instance, the concept of expiration when the spot exchange rate hits a particular barrier refers more to a knock-out option, while a fixed payout refers to different structures altogether in the derivatives market. Trading under any market conditions is not a defining feature of knock-in options specifically, as their activation depends on reaching certain price levels.