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Pricing discretely monitored Asian options under Levy processes

Fusai, G. and Meucci, A. (2008). Pricing discretely monitored Asian options under Levy processes. Journal of Banking & Finance, 32(10), pp. 2076-2088. doi: 10.1016/j.jbankfin.2007.12.027

Abstract

We present methodologies to price discretely monitored Asian options when the underlying evolves according to a generic Lévy process. For geometric Asian options we provide closed-form solutions in terms of the Fourier transform and we study in particular these formulas in the Lévy-stable case. For arithmetic Asian options we solve the valuation problem by recursive integration and derive a recursive theoretical formula for the moments to check the accuracy of the results. We compare the implementation of our method to Monte Carlo simulation implemented with control variates and using different parametric Lévy processes. We also discuss model risk issues.

Publication Type: Article
Additional Information: © 2008, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Asian options; Discrete monitoring; Quadrature; Lévy processes; Stable processes; Model risk
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/15222
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