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A generalization of Rubinstein's “Pay now, choose later”

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  • Jia‐Hau Guo
  • Mao‐Wei Hung

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. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:488–515, 2008

Suggested Citation

  • Jia‐Hau Guo & Mao‐Wei Hung, 2008. "A generalization of Rubinstein's “Pay now, choose later”," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(5), pages 488-515, May.
    • Handle: RePEc:wly:jfutmk:v:28:y:2008:i:5:p:488-515
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    Cited by:

    1. Elisa Alos & Antoine Jacquier & Jorge Leon, 2017. "The implied volatility of Forward-Start options: ATM short-time level, skew and curvature," Papers 1710.11232, arXiv.org.
    2. F. Antonelli & A. Ramponi & S. Scarlatti, 2016. "Random Time Forward-Starting Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(08), pages 1-25, December.

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