Say I have a forward start option scenario.
I want to pay now (time 0) for an option that I will receive in 3 (t) months that expires in 6 (T) months. I am wondering how much I should pay.
I think I’ve finally understood a very simple way to get the amount that should be paid:
Step 1: Find the value of an equivalent option with time to expiry (T-t) or in our case 3 months
Step 2: “Discount” this price using the dividend rate back t months (3) by multiplying it by exp(-delta*t)
Am I missing something? Seems like an easy solution to memorizing yet another formula. Let me know if this is wrong!
Thanks
I want to pay now (time 0) for an option that I will receive in 3 (t) months that expires in 6 (T) months. I am wondering how much I should pay.
I think I’ve finally understood a very simple way to get the amount that should be paid:
Step 1: Find the value of an equivalent option with time to expiry (T-t) or in our case 3 months
Step 2: “Discount” this price using the dividend rate back t months (3) by multiplying it by exp(-delta*t)
Am I missing something? Seems like an easy solution to memorizing yet another formula. Let me know if this is wrong!
Thanks
Forward Start Options
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