RANDOM TIME FORWARD-STARTING OPTIONS

DOI10.1142/S0219024916500503MaRDI QIDQ2953302zbMATH OpenOpenAlexFDO

Authors Fabio Antonelli, Alessandro Ramponi, Sergio Scarlatti

Publication date 4 January 2017

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1504.03552

zbMATH Keywords

cliquets optionsCVAforward-starting optionsrandom times

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We introduce a natural generalization of the forward-starting options, first discussed by M. Rubinstein. The main feature of the contract presented here is that the strike-determination time is not fixed ex-ante, but allowed to be random, usually related to the occurrence of some event, either of financial nature or not. We will call these options {�f Random Time Forward Starting (RTFS)}. We show that, under an appropriate "martingale preserving" hypothesis, we can exhibit arbitrage free prices, which can be explicitly computed in many classical market models, at least under independence between the random time and the assets' prices. Practical implementations of the pricing methodologies are also provided. Finally a credit value adjustment formula for these OTC options is computed for the unilateral counterparty credit risk.

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Cited in

(4)

• CVA and vulnerable options pricing by correlation expansions
• The valuation of forward-start rainbow options
• Pricing of forward-start options with default risks
• CVA and vulnerable options in stochastic volatility models

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