Lookback Option

A lookback option is a type of option that gives the holder the right to buy or sell an underlying asset at a price that is determined by looking back at a previous point in time. This can be a useful tool for investors who want to hedge against the risk of an asset's price moving against them.

For example, let's say that you are an investor who is bullish on the price of gold. You could buy a lookback call option on gold that gives you the right to buy gold at a price that is equal to the price of gold on a certain date in the past. If the price of gold goes up, you will be able to buy gold at a lower price than the current market price.

On the other hand, if the price of gold goes down, you will not be able to exercise your option and you will lose your investment. However, you will still have the protection of knowing that you will not lose more than the amount you paid for the option.

Lookback options can also be used to speculate on the future direction of an asset's price. For example, you could buy a lookback put option on gold that gives you the right to sell gold at a price that is equal to the price of gold on a certain date in the past. If the price of gold goes down, you will be able to sell gold at a higher price than the current market price.

However, if the price of gold goes up, you will not be able to exercise your option and you will lose your investment. However, you will still have the protection of knowing that you will not lose more than the amount you paid for the option.

Lookback options are a complex financial instrument and should only be used by investors who understand the risks involved.