Forward start option

In finance, a forward start option is an option that starts at a specified future date with an expiration date set further in the future.^[1] A forward start option starts at a specified date in the future; however, the premium is paid in advance, and the time of expiration is established at the time the forward start option is purchased.^[2] Since the asset price at the start of this option is not known a priori, it is common to specify that the strike price will be set in the future so that the option is initially at the money or a certain percentage in the money or out of the money. This contract can be used to give an investor exposure to forward volatility. Executive stock options can be viewed as a type of forward start option. This is because a company commits to granting at-the-money options to employees in the future.^[3]

A series of consecutive forward start options creates a cliquet option.^[2]

Valuation

In a Black–Scholes model, the value of the forward-start option is proportional to the asset price. Therefore the value of the forward-start option is a multiple of the current asset price, with that multiple depending on forward volatility.

References

↑ Musiela-Rutkowski: Martingale Methods in Financial Modelling, 2nd Edition, page 197
1 2 Riskglossary.com
↑ Spirn, Daniel. (March 31, 2008). Options, Futures, Derivatives. School of Mathematics, University of Minnesota. Retrieved from http://www.math.umn.edu/~spirn/5076/Lecture16.pdf

Derivatives market

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Terms	Credit spread Debit spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility

Vanilla options	Bond option Call Employee stock option Fixed income FX Option styles Put Warrants

Exotic options	Asian Barrier Basket Binary Chooser Cliquet Commodore Compound Forward start Interest rate Lookback Mountain range Rainbow Swaption

Combinations	Collar Covered call Fence Iron butterfly Iron condor Straddle Strangle Protective put Risk reversal

Spreads	Back Bear Box Bull Butterfly Calendar Diagonal Intermarket Ratio Vertical

Valuation	Binomial Black Black–Scholes model Finite difference Garman-Kohlhagen Margrabe's formula Put–call parity Simulation Real options valuation Trinomial Vanna–Volga pricing

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