# Forward Start Options – Introduction and Spreadsheet

Forward start options are purchased in the present, but have a strike that is determined afterwards (i.e. at the forward date) but before maturity.  At the forward date, the option becomes a standard European option. The option is initially usually at-the-money, or at some fraction above or below the spot price.

Executive compensation plans often use the future company share price is a key performance benchmark. An executive may receive a forward start call on the company’s stock price that is initially at-the-money. The option starts at a later date (with the strike determined at that date) after the trend of the stock price is established.

Cliquet (or ratchet) options consist of a standard option that starts immediately, followed by a series of consecutive forward start options. Each option starts with an at-the-money strike. This allows the holder to lock in profits over the lifetime of the option.

## Price Forward Start Options in Excel

Forward start options are defined by the following equations, given by Rubinstein (1991).

• c and p are the price of European calls and puts respectively
• r is the risk-free rate
• T is the time to maturity
• t is the time to start
• σ is the asset volatility
• N is the cumulative normal distribution
• D is the dividend
• S is the spot price
• α is a constant (the strike price equal to α S)
This Excel spreadsheet uses the equations defined above.

## 3 thoughts on “Forward Start Options – Introduction and Spreadsheet”

1. John B says:

The formulas are not enable… I’m using Excel 2007.

1. The spreadsheet works for me on Excel 2010 (I don’t have Excel 2007)

1. VIJAYKUMAR P says:

Respected Samir,

Please save the file as 97-2003 workbook.This will make the workbook compatible and can be opened in previous versions of excel.