A type of exotic options with path dependency, among many other kind of options are referred to as the Lookback options. The payoff depends on the optimal (maximum or minimum) underlying asset’s price that occur over the life of the option. By this option the holder is allowed to “look back” over time in order to determine the payoff. There are two kinds of Lookback options:
-
Lockback option with floating strike and
-
Lockback option with fix strike.
Here I will explain you Lockback option with floating strike and Arbitrage free price of Lookback options with floating strike.]
Lookback Option with Floating Strike
As the name suggests, the strike price of option is floating and it is determined at maturity. the optimal value of the underlying asset’s price during the option life is referred to as the floating strike. The the maximum difference between the market asset’s price at maturity and the floating strike is its payoff. The strike price is fixed at the lowest asset’s price of the option’s life,for the call and whereas for the put, it is fixed at the highest asset’s price.
