EFFECTIVE AND SIMPLE VWAP OPTIONS PRICING MODEL

Alexander Buryak () and Ivan Guo
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Alexander Buryak: The National Australia Bank, Group Market Risk, Market Risk Quantitative Support, 255 George St., Sydney 2000, Australia
Ivan Guo: The National Australia Bank, Group Market Risk, Market Risk Quantitative Support, 255 George St., Sydney 2000, Australia;

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 06, 1-13

Abstract: Volume weighted average price (VWAP) options are a popular security type in many countries, but despite their popularity very few pricing models have been developed so far for VWAP options. This can be explained by the fact that the VWAP pricing problem is set in an incomplete market since there is no underlying with which to hedge the volume risk, and hence there is no uniquely defined price. Any price, which is obtained will include a market price of volume risk which must be determined from the corresponding volume statistics. Our analysis strongly supports the hypothesis that the empirical volume statistics of ASX equities can be described reasonably well by fitted gamma distributions. Based on this observation we suggest a simple gamma process-based model that allows for the exact analytic pricing of VWAP options in a rather straightforward way.

Keywords: Equity option; volume weighting; analytic pricing (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)

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DOI: 10.1142/S0219024914500368

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