With respect to option contracts and other types of derivatives, it refers to the feature allowing the holder (the long) to exercise the contract using the most favorable terms achieved during the contract’s life. For example, in a lookback option (which is a path-dependent option) the holder can exercise the option using the best price that has been reached during the option’s life. In case of a lookback call on an index, the holder would receive, at expiration, the difference between the strike price and the highest price the index has reached during the lifespan of the option. Therefore, the value (i.e., the premium) of a lookback option is equal to, or higher than, that of a standard American option (vanilla American option). The larger the underlying volatility, the more valuable the lookback feature, and hence the greater the lookback premium (the difference in value between the lookback option and the vanilla option).

In addition to lookback options, lookback derivatives also include lookback swaps, lookback caps, lookback floors, lookback straddles, etc.