  This paper investigates the pricing of European-style lookback options when
the price dynamics of the underlying risky asset are assumed to follow a
Markov-modulated Geo-metric Brownian motion; that is, the appreciation rate and
the volatility of the underlying risky asset depend on unobservable states of
the economy described by a continuous-time hidden Markov chain process. We
derive an exact, explicit and closed-form solution for European-style lookback
options in a two-state regime switching model.
