Trend Derivatives : Pricing, Hedging, and Application to Executive Stock Options

Institutional but also private investors have often limited flexibility in timing their investment decision. Therefore, they look for investments that would ideally be independent of the timing decision. We introduce a new class of derivative products whose payoff is linked to the trend of the underlying instrument. By linking the trend to the payoff, the timing of the decision becomes less relevant. Therefore, trend derivatives offer some time diversification benefits. We show how trend derivatives are designed and priced. Due to their peculiar features, trend derivatives offer some interesting applications such as executive stock option plans.