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- Volatility Derivatives 1
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- Contract Description
Contract Description
The early market in cliquet options featured vanilla contracts that were simply a series of forward starting ATM options.
Rubinstein provided pricing formulae for forward-start options in a BS framework resulting in BS pricing for vanilla cliquets.
The current market for cliquet options accomodates a rich variety of features.
The most actively traded cliquets are return-based products that accumulate periodic settlement values and pay a CF at maturity.
The return characteristics and the price appeal of a cliquet can be tailored by adding caps and floors to the period returns and by introducing a strike moneyness factor different from one.
Defining the ith settlement value Ri , we have:
The payoff at maturity is then given by:
The investor forgoes returns above the local cap and is protected against returns below the local floor.