Microsoft PowerPoint - PoF.ppt

Example: Lookback optionƒ 222

Consider a traded asset (stock) with

current price S = 4USD, u = 2, and

d = 0.5, 3 periods and r = 2.5%p.p. The

Lookback option

pays off V

3

= max

0 ≤

n≤

3

S

n

-S

. Determine the price of the derivative? 3

Derivative securities: Options - Binomial asset pricing model