Pricing Discretely Monitored Asian Options by Maturity Randomization

Fusai, G., Marazzina, D. & Marena, M. (2011). Pricing Discretely Monitored Asian Options by Maturity Randomization. SIAM Journal on Financial Mathematics, 2(1), pp. 383-403. doi: 10.1137/09076115X

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We present methodologies to price discretely monitored Asian options when the underlying evolves according to a generic Levy 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 Levy-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 Levy processes. We also discuss model-risk issues.

Item Type: Article
Additional Information: Copyright, Society for Industrial Applied Mathematics 2011
Uncontrolled Keywords: Asian options, discrete monitoring, quadrature, Levy processes, stable processes, model risk
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
Divisions: Cass Business School > Faculty of Finance

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