FWD STARTING

Homogenous function with degreek

frax, ny, z)=(x)f(x, y, z) this is respect to X, Y,
not respect to Z
not only a
but also nk
finx, N, 2) = x f(x, y, z)
if you need linear,
property of linear homogenous: x2 + y 2 = fex,y)
constant return on input. input increase by 22,
interpretation:
output increase by a factor of a.

G= Max (0, ST.x)

option Application:
Maxco, 1 ST-XX)= X Max (o, St-x)
option price is line ar nomogenous at time IT |
whether it at t is linearly homogenous.
And if it is Yes, what else can. we do with it?
o.
presence humogenous pronesty
E(X) + ELY) E(2x)= aZrX)
:{(x) is a linear operation. E(X+Y) =
. E(ax) = a E(X)
.DF. Erx) [let DF be a constant, I then the whole thing is linear.
therefore. It is linear lomogenous. ... j now in §
: using Euler. Rull. Ce : 2 x + 2 like "1) a = d.)
XEST
R
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Application to I Forward Starting I option.
tej cī
l
et K= 25 j.
initiatiate
option received
option C; ( Sj, asj, T-j)
.= sj[[ j. (1,9, T-j)

unleno in at
Rewrite
definition, can
calculate.
pricing framework:
S
= |C; (1,4, F-j) | Sj.
consider this as a
then replication by holding Cj unit of St to time j..
therefore. Ca= unit "St also = c(SE, "SE, Fj)
| Forward Contract ,
on options
Option: F=X
Fj.
start at time j
no money exchape at time i because it's a forward contract
c(St, X, Tt)) F[CC St, X, TY+), j.

option price today

Fured price of such option at j
. borrows
I think it.
should be T-j. compare a
Compare it => purchase it today. It Hels
to CelTech Note
Herst) holding on to it
at time j, delive the option, get F, vetem F. PVEO
Alves - { (5,x. 16),; Je *; 4) co ®
The C, KTj} = (s. X. - Jersey
therefore
It or Fá
Fj is the real
maturty length.