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Forward Start Options Under Stochastic Volatility And Stochastic Interest Rates

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Author Info

  • 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)

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    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).

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 12 (2009)
    Issue (Month): 02 ()
    Pages: 209-225

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    Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:02:p:209-225

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    Related research

    Keywords: Forward start options; Heston's model; CIR model; affine models;

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    Cited by:
    1. Claudio Fontana & Juan Miguel A. Montes, 2012. "A unified approach to pricing and risk management of equity and credit risk," Papers 1212.5395, arXiv.org, revised May 2013.

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