Investigating the difference of option’s real values between Lookback option and European option based on price models

Abstract

The concept of pricing model is crucial for global financial markets today. Millions of investors tend to seek options to effectively maximize their returns. The lookback option is based on various exotic options in response to this trend. This paper chooses Amazon’s stock as our data to analyze and then simulate its future stock price 1000 times. By calculating the minimum and maximum value of stocks during a given period, we know the returns gained by using the lookback option and then compare the payoffs with those of the European option. We then conclude that the lookback option could lower the uncertainty over the timing of market entry. Also, the lookback option allows buyers to minimize their regret and maximize their profits. The analysis for pricing models in this paper could provide investors with a reference standard when selecting options and help investors avoid a certain degree of risk.