In the case of look back option:
A) the option holder must decide before maturity whether the option is a call or a put.
B) the option holder chooses as the exercise price any of the asset prices that occurred before the final date.
C) the option payoff is zero if the asset price is on the wrong side of the exercise price and otherwise is a fixed sum.
D) the exercise price is equal to the average of the asset's price during the life of the option.

Question

Quizplus · Accepted Answer

In a look back option, the option holder chooses any of the asset prices that occurred before the final date as the exercise price. This is what makes the option attractive as it allows the holder to maximize their profits by selecting the most advantageous exercise price. Hence, option (B) is the correct choice. The other options are not applicable to look back options.

In the Case of Look Back Option