Explanation:
A floating lookback call pays the difference between the expiration price and the minimum price of the stock over the horizon of the option. Therefore, its payoff is equal to: $50 − $35 = $15. A fixed lookback call has a payoff function equal to the difference between the maximum price during the option’s life and the strike price. Therefore, its payoff is equal to $53 − $40 = $13. The payoff difference between the two exotic options is equal to $2.
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Question 63
Trader A purchased a three-month floating lookback call option on ABA stock three months ago. Trader B purchased a three-month fixed lookback call option on the same stock during the same time period as Trader A. ABA stock finished at $50 at the end of the three-month option term, and the initial strike price was equal to $40. The minimum stock price over the investment horizon was $35, and the maximum stock price over the investment horizon was $53. The payoff difference between the floating lookback call and the fixed lookback call is closest to:
A
$2.
B
$3.
C
$8.
D
$10.
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