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Foreign equity lookback options with guarantees

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  • Lee, Hangsuck
  • Ha, Hongjun
  • Lee, Minha

Abstract

A foreign equity lookback option plays a vital role in hedging foreign exchange rate and asset price risks. Despite its importance, valuing the foreign equity lookback option is problematic because its path dependence and stochastic exchange rate complicate calculating the expected payoff. This paper delivers a unified closed-form pricing formula for the foreign equity lookback call (or put) with fixed (or floating) strike by relying on the extreme-or-nothing formulas that facilitate computing expectations. In addition, it admits valuing the options systematically with the guarantees of exchange rate and equity extremes. Numerical experiments validate the prices obtained from the analytical pricing formula.

Suggested Citation

  • Lee, Hangsuck & Ha, Hongjun & Lee, Minha, 2022. "Foreign equity lookback options with guarantees," Finance Research Letters, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:finlet:v:48:y:2022:i:c:s1544612322002173
    DOI: 10.1016/j.frl.2022.102963
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    References listed on IDEAS

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    1. Ho, Tuan & Nguyen, Yen & Parikh, Bhavik & Vo, Dinh-Tri, 2020. "Does foreign exchange risk matter to equity research analysts when forecasting stock prices? Evidence from U.S. firms," International Review of Financial Analysis, Elsevier, vol. 72(C).
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    4. Hans Gerber & Elias Shiu, 2003. "Pricing Lookback Options and Dynamic Guarantees," North American Actuarial Journal, Taylor & Francis Journals, vol. 7(1), pages 48-66.
    5. Paul Glasserman & Jeremy Staum, 2001. "Conditioning on One-Step Survival for Barrier Option Simulations," Operations Research, INFORMS, vol. 49(6), pages 923-937, December.
    6. Lee, Hangsuck & Kim, Eunchae & Ko, Bangwon, 2022. "Valuing lookback options with barrier," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    7. Chen, Son-Nan & Chiang, Mi-Hsiu & Hsu, Pao-Peng & Li, Chang-Yi, 2014. "Valuation of quanto options in a Markovian regime-switching market: A Markov-modulated Gaussian HJM model," Finance Research Letters, Elsevier, vol. 11(2), pages 161-172.
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    Cited by:

    1. Lee, Hangsuck & Ha, Hongjun & Lee, Minha, 2023. "Partial quanto lookback options," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Foreign equity lookback option; Extreme-or-nothing expectation; Joint reflection principle;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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