Two Exotic Lookback Options
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.
Volume (Year): 15 (2008)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAMF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAMF20|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Goldman, M Barry & Sosin, Howard B & Gatto, Mary Ann, 1979. "Path Dependent Options: "Buy at the Low, Sell at the High"," Journal of Finance, American Finance Association, vol. 34(5), pages 1111-27, December.
- Goldman, M Barry & Sosin, Howard B & Shepp, Lawrence A, 1979. "On Contingent Claims That Insure Ex-post Optimal Stock Market Timing," Journal of Finance, American Finance Association, vol. 34(2), pages 401-13, May.
- Peter Buchen & Otto Konstandatos, 2005. "A New Method Of Pricing Lookback Options," Mathematical Finance, Wiley Blackwell, vol. 15(2), pages 245-259.
- Peter Buchen, 2004. "The pricing of dual-expiry exotics," Quantitative Finance, Taylor & Francis Journals, vol. 4(1), pages 101-108.
When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:15:y:2008:i:4:p:387-402. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.