You hold a floating-strike lookback put option written on a stock. 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) $1.
C) $11
D) Cannot be answered without information on the strike price.

Question

Quizplus · Accepted Answer

A floating-strike lookback put option gives the holder the right to sell the stock at the lowest price observed over the option's life. In this case, the lowest observed price is $52 which is lower than the stock price at inception ($56) and at maturity ($63). Therefore, the option is exercised and the holder sells the stock at $52, resulting in a payoff of $63 - $52 = $11. However, this is a put option and the holder has to pay the strike price in order to execute the option. Since the strike price is not given, we cannot determine the exact payoff, but we know that it will be at least $1 (i.e., the difference between the stock price at maturity and the lowest observed price). Therefore, the correct answer is B.

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