A derivative instrument whose final payoff is determined based on the path taken by its underlying asset over its life, instead of being a sole function of the final price of that underlying. In other words, the payoff is determined not only by the underlying price/rate on the expiration date, but is also affected by how the underlying price/ rate changes during the contract’s lifetime. Such a derivative could be one that pays the average of observed underlying prices over the time span ending with maturity date. Path-dependent derivatives can be classified into two broad categories: weakly path-dependent and strongly path-dependent.
Examples of path-dependent derivatives include barrier options, ratchet options, Asian options, snowballs, snowblades, among others.
