Business, Legal & Accounting Glossary
A forward start option is an advance purchase of a put or call option that will become active at some specified future time. It is essentially a forward on an option, only the premium is paid in advance. The underlier and time to expiration are specified at that time. The strike price is determined when the option becomes active. Typically, it is set at-the-money based upon the underlier value at that time. Alternatively, it can be set a pre-determined percentage in-the-money or out-of-the-money.
A ratchet option (also called a reset option or cliquet option) is a series of consecutive forward start options. The first is active immediately. The second becomes active when the first expires, etc. Each option is struck at-the-money when it becomes active. The effect of the entire instrument is of an option that periodically “locks in” profits in a manner somewhat analogues to a mechanical ratchet. Ratchet features can be incorporated into other structures. For example, there are ratchet caps or ratchet floors.
Rubinstein (1991) provides analytic formulas for pricing forward start options.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Forward Start Option are sourced/syndicated and enhanced from:
This glossary post was last updated: 17th April, 2020 | 3 Views.