You hold a fixed-strike lookback put option written on a stock that was at-the-money at inception.The stock price at inception was $56,the stock price at maturity is $63,and the lowest and highest stock prices observed over the option's life are,respectively,$52 and $64.The payoff from the option at maturity is
A)Zero.
B)$4.
C)$8.
D)$11.

Question

Quizplus · Accepted Answer

A fixed-strike lookback put option gives the holder the right to sell the stock at the highest price observed during the life of the option minus the strike price. Since the option was at-the-money at inception, the strike price is $56. The highest stock price observed was $64. Therefore, the payoff is $64 - $56 = $8. However, the question asks for the payoff from a lookback put option, which actually allows the holder to sell the stock at the strike price and benefit from the lowest stock price observed. Thus, the correct calculation should be $56 - $52 = $4, making option B the correct answer.

You Hold a Fixed-Strike Lookback Put Option Written on a Stock