Please determine the most appropriate payoff formula for the following Floating Lookback put option, based on the price path summary below: Starting price of underlying (at inception): $26.69 Maximum traded price of underlying: $28.38 Minimum traded price of underlying: $24.55 Terminal price of underlying (at maturity): $25.28 Initial strike rate (if applicable): $27.37 (Assume there is only a single price observation only at maturity)
Question
Please determine the most appropriate payoff formula for the following Floating Lookback put option, based on the price path summary below: Starting price of underlying (at inception): 28.38 Minimum traded price of underlying: 25.28 Initial strike rate (if applicable): $27.37 (Assume there is only a single price observation only at maturity)
Solution
A Floating Lookback put option gives the holder the right to sell the underlying asset at the highest price it achieved during the life of the option.
However, in this case, there is only a single price observation at maturity. This means that the maximum traded price of the underlying asset is not observed continuously, but only at the end. Therefore, the payoff of the Floating Lookback put option in this case would be calculated as follows:
Payoff = Max(0, Strike price - Terminal price)
Given the details in the question:
Strike price = 25.28
We can substitute these values into the formula:
Payoff = Max(0, 25.28) Payoff = Max(0, $2.09)
Therefore, the payoff for this Floating Lookback put option is $2.09.
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