Communications for Statistical Applications and Methods

The Korean Statistical Society (한국통계학회)
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Pricing Outside Lookback Options with Guaranteed Floating Strike

  • Lee, Hangsuck (Department of Actuarial Science/Mathematics, Sungkyunkwan University)
  • Received : 2012.08.07
  • Accepted : 2012.11.01
  • Published : 2012.11.30
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Abstract

A floating-strike lookback call (or put) option gives the holder the right to buy (or sell) at some percentage of the lowest (or highest) price of the underlying asset. This paper will propose an outside lookback call (or put) option that gives the holder the right to buy (or sell) one underlying asset at its guaranteed floating-strike price that is some percentage times the smaller (or the greater) of a specific guaranteed amount and the lowest (or highest) price of the other underlying asset. In addition, this paper derives explicit pricing formulas for these outside lookback options. Section 3 and Section 4 assume that the underlying assets pay no dividends. In contrast, Section 5 derives explicit pricing formulas for these options when their underlying assets pay dividends continuously at a rate proportional to their prices. Some numerical examples are also discussed.

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References

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