FORWARD START OPTION PRICING WITH STOCHASTIC VOLATILITY: A GENERAL FRAMEWORK

摘要

In this paper we provide a general framework for pricingrnforward start derivatives, i.e. contingent claims which setrntheir exercise price on a later time than inception. We showrnthat dealing with this kind of options mainly means exposurernto future stochastic volatility. In particular, we proposerna theoretical comparison between the pricing implicationsrnof modeling through Monte Carlo simulations forward startrncalls or puts as derivatives of two state variables, namelyrnthe underlying price process and the stochastic instantaneousrnvolatility, and the same implications arising if thernstochastic implied volatility is modeled as well. Therefore,rnwe address the issue on whether it is worthwhile employingrnthe implied volatility as a primitive state variable whenrnpricing derivatives sensitive to volatility risk.