FRM Part I · FRM Exam Part I · Exotic Options
A floating-strike lookback call is bought on a stock. Over its life the minimum observed price is 42, the maximum is 61, and the final price at expiry is 55. What is its payoff?
The payoff is 13. A floating-strike lookback call pays the final price minus the lowest price observed during its life, so 55 minus 42 equals 13. It is never negative, since the final price is at least the minimum.
- A13Correct
- B6
- C19
- D0
Explanation
A floating-strike lookback call pays the final price minus the minimum price over the life: 55 - 42 = 13. Using the maximum gives 61 - 55 = 6, which is the lookback put payoff. 61 - 42 = 19 is the range, not the payoff. The payoff is positive, not zero, since the final price exceeds the minimum.
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