A new method of pricing lookback options

Buchen, P; Konstandatos, O

A new method of pricing lookback options

Buchen, P Konstandatos, O

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Publication Type:: Journal Article
Citation:: Mathematical Finance, 2005, 15 (2), pp. 245 - 259
Issue Date:: 2005-04-01

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Field	Value	Language
dc.contributor.author	Buchen, P	en_US
dc.contributor.author	Konstandatos, O https://orcid.org/0000-0002-3797-391X	en_US
dc.date.issued	2005-04-01	en_US
dc.identifier.citation	Mathematical Finance, 2005, 15 (2), pp. 245 - 259	en_US
dc.identifier.issn	0960-1627	en_US
dc.identifier.uri	http://hdl.handle.net/10453/8303
dc.description.abstract	A new method for pricing lookback options (a.k.a. hindsight options) is presented, which simplifies the derivation of analytical formulas for this class of exotics in the Black-Scholes framework. Underlying the method is the observation that a lookback option can be considered as an integrated form of a related barrier option. The integrations with respect to the barrier price are evaluated at the expiry date to derive the payoff of an equivalent portfolio of European-type binary options. The arbitrage-free price of the lookback option can then be evaluated by static replication as the present value of this portfolio. We illustrate the method by deriving expressions for generic, standard floating-, fixed-, and reverse-strike lookbacks, and then show how the method can be used to price the more complex partial-price and partial-time lookback options. The method is in principle applicable, to frameworks with alternative asset-price dynamics to the Black-Scholes world. © 2005 Blackwell Publishing Inc.	en_US
dc.relation.ispartof	Mathematical Finance	en_US
dc.relation.isbasedon	10.1111/j.0960-1627.2005.00219.x	en_US
dc.subject.classification	Finance	en_US
dc.title	A new method of pricing lookback options	en_US
dc.type	Journal Article
utslib.citation.volume	2	en_US
utslib.citation.volume	15	en_US
utslib.for	0102 Applied Mathematics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
utslib.copyright.status	closed_access
pubs.issue	2	en_US
pubs.publication-status	Published	en_US
pubs.volume	15	en_US

Abstract:

A new method for pricing lookback options (a.k.a. hindsight options) is presented, which simplifies the derivation of analytical formulas for this class of exotics in the Black-Scholes framework. Underlying the method is the observation that a lookback option can be considered as an integrated form of a related barrier option. The integrations with respect to the barrier price are evaluated at the expiry date to derive the payoff of an equivalent portfolio of European-type binary options. The arbitrage-free price of the lookback option can then be evaluated by static replication as the present value of this portfolio. We illustrate the method by deriving expressions for generic, standard floating-, fixed-, and reverse-strike lookbacks, and then show how the method can be used to price the more complex partial-price and partial-time lookback options. The method is in principle applicable, to frameworks with alternative asset-price dynamics to the Black-Scholes world. © 2005 Blackwell Publishing Inc.

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http://hdl.handle.net/10453/8303