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General lattice methods for arithmetic Asian options

By A. M. Gambaro, I. Kyriakou and G. Fusai

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

Topics: HA, HF5601, QA
Publisher: 'Elsevier BV'
Year: 2020
DOI identifier: 10.1016/j.ejor.2019.10.026
OAI identifier: oai:openaccess.city.ac.uk:23115
Provided by: City Research Online
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