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A generalization of Rubinstein's “Pay now, choose later”
Author(s) -
Guo JiaHau,
Hung MaoWei
Publication year - 2008
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20311
Subject(s) - generalization , economics , valuation of options , volatility (finance) , econometrics , implied volatility , mathematical economics , interest rate , stochastic volatility , volatility smile , maturity (psychological) , put option , contrast (vision) , value (mathematics) , strike price , exotic option , mathematics , financial economics , computer science , statistics , finance , mathematical analysis , developmental psychology , psychology , artificial intelligence
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