We introduce a natural generalization of the forward-starting options. 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 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 and in absence of simultaneous jumps between the random time and the assets’ prices. Practical implementations of the pricing methodologies are also provided. Finally, a credit value adjustment (CVA) formula for these over the counter (OTC) options is computed for the unilateral counterparty credit risk.

Antonelli, F., Ramponi, A., Scarlatti, S. (2016). RANDOM TIME FORWARD-STARTING OPTIONS. INTERNATIONAL JOURNAL OF THEORETICAL AND APPLIED FINANCE [10.1142/S0219024916500503].

RANDOM TIME FORWARD-STARTING OPTIONS

RAMPONI, ALESSANDRO;SCARLATTI, SERGIO
2016-01-01

Abstract

We introduce a natural generalization of the forward-starting options. 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 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 and in absence of simultaneous jumps between the random time and the assets’ prices. Practical implementations of the pricing methodologies are also provided. Finally, a credit value adjustment (CVA) formula for these over the counter (OTC) options is computed for the unilateral counterparty credit risk.
2016
Pubblicato
Rilevanza internazionale
Articolo
Esperti anonimi
Settore SECS-S/06 - METODI MATEMATICI DELL'ECONOMIA E DELLE SCIENZE ATTUARIALI E FINANZIARIE
English
Random times; forward-starting options; cliquets options; CVA.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2587711
Antonelli, F., Ramponi, A., Scarlatti, S. (2016). RANDOM TIME FORWARD-STARTING OPTIONS. INTERNATIONAL JOURNAL OF THEORETICAL AND APPLIED FINANCE [10.1142/S0219024916500503].
Antonelli, F; Ramponi, A; Scarlatti, S
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2108/168843
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