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Two Exotic Lookback Options

Bermin, Hans-Peter LU ; Buchen, Peter and Konstandatos, Otto (2008) In Applied Mathematical Finance 15(4). p.387-402
Abstract
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... (More)
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. (Less)
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author
publishing date
type
Contribution to journal
publication status
published
subject
keywords
exotic options, lookback options, barrier options, option pricing, method of images
in
Applied Mathematical Finance
volume
15
issue
4
pages
16 pages
publisher
Routledge
external identifiers
  • scopus:47749155213
ISSN
1350-486X
DOI
10.1080/13504860802012824
language
English
LU publication?
no
id
a3ef5c0f-3b35-4e0c-97cd-7c9ba264e52e
date added to LUP
2017-01-21 17:19:03
date last changed
2017-02-10 15:30:07
@article{a3ef5c0f-3b35-4e0c-97cd-7c9ba264e52e,
  abstract     = {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.},
  author       = {Bermin, Hans-Peter and Buchen, Peter and Konstandatos, Otto},
  issn         = {1350-486X},
  keyword      = {exotic options,lookback options,barrier options,option pricing,method of images},
  language     = {eng},
  number       = {4},
  pages        = {387--402},
  publisher    = {Routledge},
  series       = {Applied Mathematical Finance},
  title        = {Two Exotic Lookback Options},
  url          = {http://dx.doi.org/10.1080/13504860802012824},
  volume       = {15},
  year         = {2008},
}