Why Forward Skew Matters Differently for Cliquets and Callables

Summary

The document compares the sensitivity of two option structures to forward volatility skew: a forward-starting payoff such as a cliquet and a spot-starting callable exotic. The response argues that cliquets can be more directly exposed to skew because their valuation averages Black–Scholes prices across possible strikes. The curvature of option value as strike changes therefore matters to the payoff’s sensitivity.

For callables, the explanation emphasizes the exercise decision. Forward volatility affects the value comparison that determines whether exercise is optimal, while a modest shift in skew may have less influence because the decision is not simply a comparison between options at different strikes. The answer consequently suggests greater importance for forward volatility than forward skew in callables. This is a qualitative distinction only: the document supplies no model, numerical example, precise sensitivity measure, or assumptions about the callable’s structure, so the relative effect may depend on product details and market dynamics.

Key ideas

• Cliquet valuation can reflect forward skew through averaging option values at different possible strikes.
• Strike convexity helps explain why skew may matter to forward-starting payoffs.
• Callable exercise decisions compare immediate exercise value with continuation value.
• The response presents callables as more sensitive to forward volatility than to modest skew changes.
• The comparison is qualitative and does not establish a general quantitative ranking.

Tags

# The difference in Skew forward sensitivity of spot vs forward start payoffs?


# The difference in Skew forward sensitivity of spot vs forward start payoffs?












Are spot starting exotics like callables sensitive to forward skew ( skew dynamic) the same way a forward starting option like a cliquet is sensitive to the forward skew ?

## Answer by Arshdeep (score 1)

https://quant.stackexchange.com/a/79860

Yes but more so to forward vol than forward skew. With cliquet you are averaging the BS price at different possibilities of the strike. So the convexity matters (i.e. what is the BS price at a higher strike w.r.t a lower strike).

With callables the forward vol determines exercise. If you move around skew a bit, the exercise boundary is still comparing the immediate gain with the option cost, rather than one option cost with the other. So you can create skew but ultimately you're not comparing the high strike call with low strike call, so skew is less important.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.