how do they determine the amount of premium on cliquet options? im still trying to google, anyone know of a good link?
Why is it different than any other derivative? The standard calculus approach works fine (Solve the B-S differential equation with cliquet boundary conditions). Of course, you can use Monte Carlo if you want some unusual distribution. I’m sure binomial models work fine too. Now if you want how to determine what the real world price ought to be, I can’t do that for a ATM European S&P call. Edit: Did you want me to find the solution? I’d just use Google first and then my library.
no, I already got the part about using B-S for cliquet and similar ladder options. what i want to know specifically is , my cliquet option on SPY can be priced with S&P strike set at 1270 today. based on this i can determine the premium amount. but what about time Ti which is maybe 1 year forward. when I reset my S&P strike at Ti, one year later - is there going to be another premium payment, apart from the calculation on the profit payoff during reset?
No you pay upfront for essentially a series of options (the cliquet), although you do not know the strike of the forward options.