As a kind of exotic options, the holder of lookback option
could look back on the evolution process of underlying assets during the life of option at maturity.
2] and F values in Table VII suggest that the average-strike put option model performs relatively better (worse) on the noninformation-intensive (information-intensive) subsample and that the lookback option
model does the reverse.
The type of contract that provides this feature to its fullest extent is the lookback option
, whose payoff at expiry T writes (for a call with fixed strike):
The lookback option
was analyzed by Goldman, Sosin, and Gatto (1979).
Due to a potentially excessive liability, hedging the lookback option
embedded in a ratchet GMDB is a more difficult problem than hedging options embedded in a GMDB with return of premium, roll-up or reset guarantees.
Kwok, "Characterization of optimal stopping regions of American Asian and lookback options
," Mathematical Finance, vol.
After reviewing the technical background, he covers simple exotic options, dual expiry options, two-asset rainbow options, barrier options, lookback options
, Asian options, and exotic multi-options.
Therefore, we make use of the probability density function for discrete lookback options
in AitSahlia and Lai (1998) to develop our pricing and hedging formulas for the discrete dynamic guaranteed fund.
Vorst, 1997, "Currency Lookback Options
and Observation Frequency--A Binomial Approach", Journal of International Money and Finance, 16:173-187
In particular, it can be used to value the long-term American options and American exotic options, such as lookback options
and Asian options, to a high degree of accuracy.