Passport Options

Abstract This article outlines the pricing and hedging of an exotic option called a passport option . The passport option was invented in the mid‐1990s by quantitative analysts at Bankers Trust and this falls into the more general class of products called options on traded accounts . The buyer of a passport option pays a premium and trades in an underlying asset (up to predefined limits). At expiry, the buyer receives any profit on this account, but is not responsible for losses. For this reason, the option has also been called a perfect trader option . In a general framework, the passport option is related to a lookback option, a “best price” option.