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Forward Start Options Under Stochastic Volatility And Stochastic Interest Rates

Author

Listed:
  • REHEZ AHLIP

    (School of Computing and Mathematics, University of Western Sydney, Penrith South, NSW 1797, Australia)

  • MAREK RUTKOWSKI

    (School of Mathematics and Statistics, University of New South Wales, Sydney, NSW 2052, Australia)

Abstract

Forward start options are examined in Heston's (Review of Financial Studies 6 (1993) 327–343) stochastic volatility model with the CIR (Econometrica 53 (1985) 385–408) stochastic interest rates. The instantaneous volatility and the instantaneous short rate are assumed to be correlated with the dynamics of stock return. The main result is an analytic formula for the price of a forward start European call option. It is derived using the probabilistic approach combined with the Fourier inversion technique, as developed in Carr and Madan (Journal of Computational Finance 2 (1999) 61–73).

Suggested Citation

  • Rehez Ahlip & Marek Rutkowski, 2009. "Forward Start Options Under Stochastic Volatility And Stochastic Interest Rates," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 209-225.
    • Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:02:n:s0219024909005166
    DOI: 10.1142/S0219024909005166
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    Citations

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    Cited by:

    1. 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.
    2. Rehez Ahlip & Laurence A. F. Park & Ante Prodan, 2017. "Pricing currency options in the Heston/CIR double exponential jump-diffusion model," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1-30, March.
    3. Claudio Fontana & Juan Miguel A. Montes, 2012. "A unified approach to pricing and risk management of equity and credit risk," Papers 1212.5395, arXiv.org, revised May 2013.

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