Lookback Currency Option

Lookback Currency Option
A put or call option which gives its holder the right to buy, in the case of a call, or sell, in the case of a put, a foreign currency at the most favorable exchange rate available during the life of the option. Lookback options-with the lookback period covering the entire option period-are the most common type of reset options used in the currency markets. Improvement in the strike of a lookback currency option is based on daily exchange rate observations made over the life of the option.
The value of the lookback call at expiration will be at least as great as the value of the standard option with a strike equal to the underlying exchange rate at the time of the option purchase. The price of a lookback currency option will usually be several times the price of an at-the-money standard option at the outset of the contract. If the options were traded in the secondary market during their life, the relationship between the value of the lookback currency option and an otherwise comparable standard option would depend increasingly on two relationships: (1) the distance between the lowest exchange rate (in the case of a call) and the current exchange rate, and (2) the time remaining in which the exchange rate could continue to move in a favorable direction or, alternatively, establish an even lower strike rate and then appreciate. In general, the narrower the trading range has been, the lower the value of the lookback currency option as expiration approaches. See also Best Buy Option, Partial Lookback Warrant or Option.

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