Jun 23

Lookback option – 3.5 min screencast

by David Harper, CFA, FRM, CIPM

FRM |

lookback

Instead of a strike price, a lookback option uses the minimum/maximum asset price.

  • Lookback call payoff = MAX[0,stock price – minimum price during holding]
  • Lookback put payoff = MAX[0,maximum price during holding – stock price]

Lookback options are often used for commodities, as a lookback call is a way to buy the asset at the lowest price and a lookback put is a way to sell the asset at the highest price. Although the pricing formulas assuming continuous asset price paths, the frequency of measuring (observing) the asset matter to valuation: the more frequently the asset is measured, the greater the likely "peak" in the put or the "nadir" in the call.

Screencast:

Comments

  1. Be the first to leave a comment!

Leave a Comment