This paper proposes a new approximation formula for pricing average options on commodities under a stochastic volatility environment. In particular, it derives an option pricing formula under Heston and an extended -SABR stochastic volatility models (which includes an extended SABR model as a special case). Moreover, numerical examples support the accuracy of the proposed average option pricing formula.

Akihiko Takahashi

Kenichiro Shiraya

Research Papers in Economics

English

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denotes the transpose of x. Hn(x;Σ) denotes the Hermite polynomial of degree n and Σ = ∫ T 0 jq1tj2dt. For the derivation and more general results, see Section 3 in Takahashi, Takehara and Toda

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