# Look back call option

Hi can you guys explain what a standard look back call option is… in layman’s terms…

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Yours respectfully,

sorry… i didnt realize it was annoying…

the answer is 0.2… i cant figure out though how to be sure that the events x being 2 and x being 4 are mutually exclusive…

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No @yasin. Not at all. The statement wasn’t meant to be offensive. I thought it would be better for you to do some research first for your own learning as you will gain more for your own benefit.

I reckon the question asks the prob. that x will take on x =4 or x =2. To find that prob of x = 4, you simply take {F(4)}-{F(3)} = p(4) = 0.1. This is also applied to find the prob {F(2)}-{F(1)} = p(2) = 0.1. Therefore, you just add them up 0.1 + 0.1 = 0.2. Remember? The cumulative distribution is the prob. that will take a value of less than or equal to. F(4) = p(1) + p(2) + p(3) + p(4) = p(x\leq4).

However, if two events are mutually exclusive, then the probability of either occurring is the sum of the probabilities of each occurring. According to the specific addition rule, it is only valid when the events are mutually exclusive. P(A or B) = P(A) + P(B). They are disjoint.

thanks… pyng… yes ure right… i will try to dig more for answers… for this one … the question doesnt say that x = 4 and x = 2 are mutually exclusive… yet wen they find prob of x = 2 or x =4… they add the probabilities without subtracting their product… i am wondering if its implicitly stated in the question that these events are mutually exclusive but i m failing to see it…

I see. Is this question from the CFAI book? If so, I’m pretty sure they should provide the explanation for the correct answer. Therefore, you can have a look and if you still cannot wrap your head around then just post the question here. Folks here esp @S2000magician, @breadmaker, @fino_abama, @chadsandstedt, and other fellows are willing to help but you must be willing to do your homework first. Now go back and hit it hard son!

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It doesn’t have to.

If you have exactly 2 successes then you don’t have exactly 4 successes (because 2 ≠ 4).

If you have exactly 4 successes then you don’t have exactly 2 successes (because 4 ≠ 2).

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yes… from the cfa book…
this is the solution they gave…

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thanks magician… jst took a picture of this… to look at for clarity during future run ins with confusion…

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there are at least two types of lookback options:
standard loockbacks
and extrema lookbacks.

one way to remember the difference is that
standard lookback: use the stock max or min as the strike price
extrema lookback: use the stock max or min as the stock price

that is,
standard lookback call payoff = St - Smin
extrema lookback call payoff = max(Smax - K, 0)
where Smin is the lowest stock price during the life of the option
and Smax is the maximum stock price.

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