CURRENCY LOOKBACK OPTIONS AND OBSERVATION FREQUENCY - A BINOMIAL APPROACH

In the last decade, interest in exotic options has been growing, espec ially in the over-the-counter currency market. In this paper we consid er lookback currency options, which are path-dependent. We show that a one-state variable binomial model for currency lookback options can b e constructed with the same computational complexity, or should we say simplicity, as the standard binomial model. Furthermore, the model al lows us to investigate a second very important feature of real-life lo okback option contracts - the observation frequency. (C) 1997 Elsevier Science Ltd.