PRICING ARITHMETIC ASIAN OPTIONS UNDER THE CEV PROCESS

Bin Peng () and Fei Peng ()
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Bin Peng: Renmin University, Beijing, P. R., China
Fei Peng: University of British Columbia, Vancouver, Canada

Journal of Economics, Finance and Administrative Science, 2010, vol. 15, issue 29, 7-13

Abstract: This paper discusses the pricing of arithmetic Asian options when the underlying stock follows the constant elasticity of variance (CEV) process. We build a binomial tree method to estimate the CEV process and use it to price arithmetic Asian options. We find that the binomial tree method for the lognormal case can effectively solve the computational problems arising from the inherent complexities of arithmetic Asian options when the stock price follows CEV process. We present numerical results to demonstrate the validity and the convergence of the approach for the different parameter values set in CEV process.

Keywords: Exotic options; arithmetic Asian options; binomial tree method; CEV proces (search for similar items in EconPapers)
Date: 2010
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