Communications in Mathematical Finance

Pricing Lookback Option Using Multinomial Lattice

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  • Abstract

    Lookback options is one of the most famous path-dependent exotic options in financial market, whose payoffs depend on the extremum of an underlying asset during the contract life time. Many works have been conducted in pricing Lookback option using continuous time model which is not better compared to numerical methods in pricing path dependent options in discrete situation. This paper tagets to contribute the concept of option pricing with multinomial lattice in pricing Lookback options. Quadrinomial lattice is constructed using moment matching technique. The results obtained in pricing floating lookback option are compared to well known Black-Scholes model.

    Keywords: Lookback option; Quadrinomial lattice; Black-Scholes; Momentmatching; Relative entropy