What is it?
- An option that will start some time in the future, where the strike price is not fully determined until an intermediate date t before maturity T.
How is it constructed?
- It can be constructed as a call or a put, and can be either European or American.
- On the start date, the strike is typically the prevailing spot price (ATM), or is set to a proportion of the underlying asset price at the time of determination.
- The premium is paid at time zero.
When is it used?
- Enables investors to monetise growth in dividends without taking market risk.
- They are the building blocks to cliquet options.
What are the benefits?
- Cost is known although the option comes into existence only in the future.
- Maximum loss is the premium paid.
The Financial Engineer 