I am trying to understand the purpose of inputs the software of my company is using. Amongst others it needs calibration instruments, a model type, initial values of the respective underylings and a yield curve. Furthermore one can input the forward price curve of the respective underlyings. The pricing of derivatives is done by Monte Carlo. Where in the pricing pipeline would it be possible/useful to use the forward price curve?


The forward curve is not passed directly. Instead a repocurve is passed which is calculated by adding a bump to the yield curve

  • 1
    $\begingroup$ Normally, you can either input a) spot prices + yield curve, or b) forward prices. $\endgroup$ Oct 15 at 10:11
  • $\begingroup$ The original Black Scholes Merton formula was written in terms of the spot price S, but a few years later Fischer Black showed that it was (slightly) simpler if written in terms of the forward price F. Which makes sense since the option involves a delivery in the future (at maturity) so the forward price at that maturity is natural to consider. $\endgroup$
    – noob2
    Oct 15 at 10:29
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    $\begingroup$ Not sure what underlying you want to know about specifically but here is a working example showing the equivalence of Black Scholes (spot) and Black76 (forward). Generally, I suggest asking at work directly. I doubt anyone minds explaining implementations if you need this for work. $\endgroup$
    – AKdemy
    Oct 15 at 10:37
  • $\begingroup$ @DaneelOlivaw in this case spot, yield curve and forward prices are passed $\endgroup$
    – Roman27
    Oct 15 at 12:03
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    $\begingroup$ @Roman27 what is the "yield curve" exactly? If the input yield curve is expected to be pure interest rate, then the forward contains asset-specific term structure information which is not captured by the IR yield curve, such as borrow cost term structure. If the yield curve is supposed to be the term structure of the asset itself, I think passing the forward is redundant if spot and yield curve are already passed. $\endgroup$ Oct 15 at 13:01

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