For the lookback call:
a. What is the value of a lookback call as St approaches zero? Verify that the formula gives you the same answer.
b. Verify that at maturity the value of the call is ST ˆ’ ST.

A European lookback call at maturity pays ST ˆ’ ST. A European lookback put at maturity pays ST ˆ’ ST. (Recall that ST and ST are the maximum and minimum prices over the life of the option.) Here is a formula that can be used to value both options:

Where

The value of a lookback call is obtained by setting St = St and ω = 1. The value of a lookback put is obtained by setting ËœSt = St and ω = ˆ’1.

Transcribed Image Text:

-8(T-t) 2(r-8) (23.47) N (odg 65