Selective Memory

Posted: 1 Jun 2001

See all articles by Harry M. Kat

Harry M. Kat

Independent

Ronald C. Heynen

Bank of America - Market Risk Management

Abstract

Lookback options provide investors with perfect market timing services. However, these options are hardly ever traded because they are much more expensive than ordinary options. The problem with standard lookbacks is that they provide the investor with much more timing than typically required. In other words, the lookback feature can remain limited to only the first (for entry timing) or the last (for exit timing) part of the options' life. In this article we provide closed-form pricing formulas for such options, fixed-strike as well as floating-strike. Analysis shows how the prices of such 'partial lookback options' respond to a change in the monitoring period. Options with relatively short lookback periods appear to offer a good solution to most timing problems at a reasonable price.

JEL Classification: G13

Suggested Citation

Kat, Harry M. and Heynen, Ronald C., Selective Memory. Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=268830

Ronald C. Heynen

Bank of America - Market Risk Management ( email )

1 Alie Street
London E1 8DE
United Kingdom

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