A generalization of rubinstein's "pay now, choose later"

Jia-Hau Guo, Mao Wei Hung*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

This article provides quasi-analytic pricing formulae for forward-start options under stochastic volatility, double jumps, and stochastic interest rates. Our methodology is a generalization of the Rubinstein approach and can be applied to several existing option models. Properties of a forward-start option may be very different from those of a plain vanilla option because the entire uncertainty of evolution of its price is cut off by the strike price at the time of determination. For instance, in contrast to the plain vanilla option, the value of a forward-start option may not always increase as the maturity increases. It depends on the current term structure of interest rates.

Original languageEnglish
Pages (from-to)488-515
Number of pages28
JournalJournal of Futures Markets
Volume28
Issue number5
DOIs
StatePublished - 1 May 2008

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