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fader option
how to price a fader option??and is there any paper about this type of option??tks for your info provided..
fader option
If I'm right, it's an option where the nominal decreases if at some spot fixings is above/below a level.To price it, you have to price for example:- a long position in a call for a nominal of 100, maturity T- a short position in a strip of X call with a european trigger (the level), maturity Ti < T, foward delivery at T and a nominal equals to 100/X where X is the number of stripped options.Maybe it will help you
fader option
>how to price a fader option??Is this the same as fade-in option??
fader option
yes... i think it is also called fade in/out option....well , whe n pricing it (for daily fixing one) do we need to build the whole vol surface for each day??? or what vol should we use?
fader option
for a fader that pays(S_T-K)^{+} I_Twhere dS=S sigma(S,t) dt dI = H(S_T-B) dti.e. call payoff times #days spot spends above B<Kwe can derive a Dupire fwd eq under local vol framework:d (S_T-K)^{+} I_T = H(S_T-K) I_T dS_T + 1/2 dirac(S_T-K) dS_T^2 + (S_T-K)^{+} H(S_T-B) dTso dFader/dT= 1/2 K^2 sigma^2(K,T) d^Fader/dK^2 + C(K,T)where C(K,T) is the European call priceM
fader option
Benoitben mentioned what is commonly known in the FX world as a simple fadeout option. The fadein is just the strip of single discrete ki vanillas in his reply. Simple analytic solutions exist for these that take into account vol and interest rates to each "fixing" as well as simple extensions to include a knockout barrier where you get to keep the amount accrued in a fadein on knockout or lose everything. Most complicated variants that include caps and floors on the amount accrued or accelerating/decelerating features are best handled by finite difference methods.
fader option
"Simple analytic solutions exist for these that take into account vol and interest rates to each "fixing" "can u tell how to do that?n any paper about it?
fader option
These formulas are probably available in most banks' fx derivatives research department although I have not seen a detail publication yet. And I can't reveal anything as they are proprietary material 
MForde has an interesting derivation below that factors in the skew if one can ignore the risk neutral drift.
MForde has an interesting derivation below that factors in the skew if one can ignore the risk neutral drift.