Two Exotic Lookback Options

Hans-Peter Bermin, Peter Buchen, Otto Konstandatos

Research output: Contribution to journalArticlepeer-review

Abstract

This paper formally analyses two exotic options with lookback features, referred to as extreme spread lookback options and look‐barrier options, first introduced by Bermin. The holder of such options receives partial protection from large price movements in the underlying, but at roughly the cost of a plain vanilla contract. This is achieved by increasing the leverage through either floating the strike price (for the case of extreme spread options) or introducing a partial barrier window (for the case of look‐barrier options). We show how to statically replicate the prices of these hybrid exotic derivatives with more elementary European binary options and their images, using new methods first introduced by Buchen and Konstandatos. These methods allow considerable simplification in the analysis, leading to closed‐form representations in the Black–Scholes framework.
Original languageEnglish
Pages (from-to)387-402
Number of pages16
JournalApplied Mathematical Finance
Volume15
Issue number4
DOIs
Publication statusPublished - 2008
Externally publishedYes

Subject classification (UKÄ)

  • Economics

Free keywords

  • exotic options
  • lookback options
  • barrier options
  • option pricing
  • method of images

Fingerprint

Dive into the research topics of 'Two Exotic Lookback Options'. Together they form a unique fingerprint.

Cite this