Path-dependent option

Path-dependent option

An option whose value depends on the sequence of prices of the underlying asset rather than just the final price of the asset.

Path Dependent Option

An option contract whose price is determined according to some formula involving the price of the underlying asset over time. Most options have prices that are dependent upon the value of the underlying asset at the time the option is exercised. A path dependent option, on the other hand, uses a more complex formula. For example, in some Asian options, the strike price is the average of the prices of the underlying asset over the life of the contract.
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References in periodicals archive ?
A barrier option is a path-dependent option which is exterminated (knocked out) or initiated (knocked in) if the underlying spot price hits the specified barrier level during the life of the option.
(2017) [25] studied the pricing of vulnerable path-dependent options using double Mellin transforms and obtained an explicit form pricing formula or semianalytic formula in each path-dependent option.
This implies that the option is an ECC path-dependent option with expected outflows, due to lapses, at fixed dates.
As Parisian option is a path-dependent option like barrier option, the price depends on the path of an underlying asset as well as payoff at the maturity.
Things are more complicated in the case of exotic path-dependent option such as Asian power options developed in this paper whose payoff depends on the geometric or arithmetic average of the underlying asset raised to power.
Things are more complicated in the case of path-dependent options. The analytical solution of the pricing problem is not available and numerical approximations must be used.
It is one kind of path-dependent options where the payoff is based on the maximum or the minimum of the underlying asset price during the drift of the option.
Asian options are a kind of common strong path-dependent options, whose value depends on the average price of the underlying asset during the life of the option.
Linetsky, "Pricing and hedging path-dependent options under the CEV process," Management Science, vol.
Kou, 1999, "Connecting Discrete and Continuous Path-Dependent Options," Finance and Stochastics, 3, 55-82.
Yen, "Pricing discrete path-dependent options under a double exponential jump-diffusion model," Journal of Banking and Finance, vol.
Chapter 15 looks at advanced derivative designs and strategies including portfolio insurance, customized products, and exotic options such as binary and path-dependent options. Finally, the book ends with a chapter entitled "Financial Risk Management," which discusses the structure of the derivatives industry (d ealers) and miscellaneous issues, including accounting for derivatives.