Pathdependent Options Financial Glossary

What is it? Options whose exercise is influenced by the historical trend in interest rates in addition to the current level of interest rates. The exercise of a path dependent option is influenced by whether or not it is in the money as well as by how many times that option has previously been that deep in the money. Loan prepayments are path dependent. For example, if interest rates fall to 8 percent, a borrower with an 11 percent loan is less likely to prepay his loan than another borrower if rates have fallen to 8 percent and returned to 11 percent several times since the first borrower obtained his loan but only fallen to 8 percent once since the second borrower obtained his loan.

Finance Term Definition Added By: Trinity

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