FORWARD START OPTIONS UNDER STOCHASTIC VOLATILITY AND STOCHASTIC INTEREST RATES

Rehez Ahlip () and Marek Rutkowski ()
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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

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 02, 209-225

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).

Keywords: Forward start options; Heston's model; CIR model; affine models (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024909005166

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