Lookback Options with Discrete and Partial Monitoring of the Underlying Price.

Posted: 1 Jun 2001

See all articles by Harry M. Kat

Harry M. Kat

Independent

Ronald C. Heynen

Bank of America - Market Risk Management

Abstract

The specifications of the lookback options traded in today's OTC markets do not match the specifications of the contracts studied by academics. In practice, monitoring of the reference index may be done discretely and at the same time be limited to a specific subperiod. In this article we show that in the world of Black and Scholes (1973) discrete lookback options can be priced in closed-form. We derive pricing formulas for a variety of full and partial lookback options where monitoring takes place at non-necessarily equally spaced points in time. Analysis shows that monitoring the reference index discretely instead of continuously may have a very significant effect on the prices of lookback options, but does not introduce new hedging problems.

JEL Classification: G13

Suggested Citation

Kat, Harry M. and Heynen, Ronald C., Lookback Options with Discrete and Partial Monitoring of the Underlying Price.. Applied Mathematical Finance, Vol. 2, No. 4, December 1995; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=265012

Harry M. Kat (Contact Author)

Independent

No Address Available

Ronald C. Heynen

Bank of America - Market Risk Management ( email )

1 Alie Street
London E1 8DE
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,643
PlumX Metrics