Pricing options with American-style average reset features

Chuang-Chang Chang, San-Lin Chung and Mark Shackleton

Quantitative Finance, 2004, vol. 4, issue 3, 292-300

Abstract: This study extends the Hull and White (1993 J. Derivatives 1 21-31) binomial method to construct a trinomial model for the valuation of American-style options whose strike price can be reset to a new level. The reset criterion is conditioned upon the average underlying asset price hitting the reset barrier in a specified period although the model proposed can accommodate other features. For prices benchmarked against ordinary Asian options, we investigate the difference between a daily reset warrant and a period-average reset warrant and find that the number of time steps between observations affects the value of American-style average price options and period-average reset options.

Date: 2004
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DOI: 10.1088/1469-7688/4/3/005

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