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Some exotic options are said to be path-dependent. Their terminal value (at exercise or expiration) depends upon the value of the underlier, not only at that time, but also at prior points in time. In this sense, the option’s terminal value depends upon the “path” taken by the underlier over the life of the option.
A call option is not path-dependent. Its value at exercise or expiration depends on the value of the underlier only at that point in time..
By comparison, an Asian option is path-dependent. Its value at expiration depends on the average value of the underlier over the life of the option. A barrier option is also path-dependent. The option’s value at expiration depends upon both the value of the underlier at expiration but also on whether past values of the underlier ever hit a barrier. Chooser and Lookback options are also path-dependent.
Pricing or calculating the Greeks is typically more difficult for path-dependent options than for non-path dependent options.
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This glossary post was last updated: 17th April, 2020 | 0 Views.