Path-dependent contingent claim ($C=F((S_u{)}_{0\le u\le T})$)

A contingent claim whose payoff depends on the underlying price history, rather than only its terminal price. Asian options use averages, barrier options use whether a threshold has been crossed, and lookback options use running extrema. In the Black-Scholes model, the Brownian Martingale representation theorem still gives a replicating strategy; its portfolio wealth need not be a function of the current stock price alone. Adding a running integral or extremum can give a finite-dimensional state for pricing.

A path-dependent contingent claim whose payoff depends on the running minimum or maximum of the underlying stock. Floating-strike calls and puts pay $S_T-{\min }_{u\le T}{S}_u$ and ${\max }_{u\le T}{S}_u-S_T$, respectively. Fixed-strike versions use positive parts of the difference between a running extremum and a specified strike. A sufficient pricing state contains the current price and the relevant running extremum.

For running maximum $M_t={\max }_{u\le t}{S}_u$, a smooth price $v(t,S_t,M_t)$ has an Itô formula term $v_{m}d{M}_t$. The maximum increases only when $S_t=M_t$. A self-financing portfolio in stock and bank account cannot supply an extra singular finite-variation term there, so the smooth price must satisfy the displayed boundary condition. Inside $0<s<m$, it obeys the Black-Scholes equation in the price variable. The condition need only hold before maturity, where terminal corners may destroy differentiability.