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The square-root process and Asian options

By Angelos Dassios and Jayalaxshmi Nagaradjasarma

Abstract

Although the square-root process has long been used as an alternative to the Black-Scholes geometric Brownian motion model for option valuation, the pricing of Asian options on this diffusion model has never been studied analytically. However, the additivity property of the square-root process makes it a very suitable model for the analysis of Asian options. In this paper, we develop explicit prices for digital and regular Asian options. We also obtain distributional results concerning the square-root process and its average over time, including analytic formulae for their joint density and moments. We also show that the distribution is actually determined by those moments.Quantitative Finance classification scheme; DER P&H,

DOI identifier: 10.1080/14697680600724775
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