Lookback Options with Discrete and Partial Monitoring of the Underlying Price.
Posted: 1 Jun 2001
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: Suggested Citation