A knock in (aki) is a European vanilla with an American barrier. The barrier can only be hit (activating the underlying vanilla option) if the option is moving out of the money.
If during the option's life the barrier:
Is hit, the payout is that of the underlying vanilla option.
Is not hit, the underlying option is not activated and there is no payout.
There are two types of regular knock in options:
Normal (or out of the money knock in)
In this type of knock in, you define the barrier for a:
Call (also known as a down and in call), below the underlying asset and the strike (the strike itself should be above the underlying asset).
Put (also known as an up and in put), above the underlying asset and the strike (the strike itself should be below the underlying asset).
This means that as the barrier is reached the underlying vanilla option has no intrinsic value and a relatively low price.
In the money knock in
In this type of knock in, for a:
Call, you define the barrier above the strike and below the underlying asset.
Put, you define the barrier below the strike and above the underlying asset.
This means that as the barrier is reached the underlying vanilla option has intrinsic value and a relatively high price.