Forward start option
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In finance, a forward start option is an option that starts at a specified future date with an expiration date set further in the future.[1]
A forward start option starts at a specified date in the future; however, the premium is paid in advance, and the time of expiration is established at the time the forward start option is purchased.[2]
Pricing of Asset[edit]
Since the asset price at the start of this option is not known a priori, it is common to specify that the strike price will be set in the future, so that the option is initially at the money or a certain percentage in the money or out of the money.
This contract can be used to give an investor exposure to forward volatility.
Example of Forward Start Option[edit]
Executive stock options can be viewed as a type of forward start option. This is because a company commits to granting at-the-money options to employees in the future.[3]
Forward Start Options Series[edit]
A series of consecutive forward start options creates a cliquet option.[2]
Valuation[edit]
In a Black–Scholes model, the value of the forward-start option is proportional to the asset price.
Therefore, the value of the forward-start option is a multiple of the current asset price, with that multiple depending on forward volatility.
References[edit]
- ^ Musiela-Rutkowski: Martingale Methods in Financial Modelling, 2nd Edition, page 231
- ^ a b Riskglossary.com
- ^ Spirn, Daniel. (March 31, 2008). Options, Futures, Derivatives. School of Mathematics, University of Minnesota. Retrieved from http://www.math.umn.edu/~spirn/5076/Lecture16.pdf Archived 2013-11-03 at the Wayback Machine
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