City Research Online

Abstract

In this research, we develop a new discrete-time model approach with flexibly changeable driving dynamics for pricing Asian options, with possible early exercise, and a fixed or floating strike price. These options are ubiquitous in financial markets but can also be recast in the framework of real options. Moreover, we derive an accurate lower bound to the price of the European Asian options under stochastic volatility. We also survey theoretical aspects; more specifically, we prove that our tree method for the European Asian option in the binomial model is unconditionally convergent to the continuous-time equivalent. Numerical experiments confirm smooth, monotonic convergence, highly precise performance, and robustness with respect to changing driving dynamics and contract features.

Publication Type:	Article
Additional Information:	© Elsevier 2020. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords:	Finance, Discrete-time model, Tree method, Asian option, Early exercise, Stochastic volatility
Subjects:	H Social Sciences > HA Statistics H Social Sciences > HF Commerce > HF5601 Accounting Q Science > QA Mathematics
Departments:	Bayes Business School > Actuarial Science & Insurance
SWORD Depositor:	Symplectic Administrator

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