In finance, a forward start option is an

option Option or Options may refer to: Computing *Option key, a key on Apple computer keyboards *Option type, a polymorphic data type in programming languages *Command-line option, an optional parameter to a command *OPTIONS, an HTTP request method ...

that starts at a specified future date with an expiration date set further in the future. 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.Riskglossary.com
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Pricing of Asset

Since the asset price at the start of this option is not known ''

a priori ("from the earlier") and ("from the later") are Latin phrases used in philosophy to distinguish types of knowledge, justification, or argument by their reliance on empirical evidence or experience. knowledge is independent from current ex ...

'', it is common to specify that the

strike price In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set ...

will be set in the future, so that the option is initially

at the money In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a ...

or a certain percentage in the money or out of the money. This

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to ...

can be used to give an

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...

exposure to forward volatility.

Example of Forward Start Option

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.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

Forward Start Options Series

A series of consecutive forward start options creates a cliquet option.

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

htpootp://www.Forbes.com Derivatives (finance) {{econ-stub