Pricing of discretely sampled arithmetic Asian options, under the Hull–White interest rate model

Bara Kim, Jeongsim Kim, Hyungkuk Yoon and Jinyoung Lee

The North American Journal of Economics and Finance, 2024, vol. 74, issue C

Abstract: This paper studies the pricing of discrete arithmetic Asian options (AAOs) with fixed strikes under the Hull–White interest rate model. For the pricing of AAOs, we first investigate the stochastic dynamics of the price of the underlying asset under the T-forward measure, and then study the distribution of the discrete arithmetic average of the underlying asset price. Specifically, we provide the first three moments of the discrete arithmetic average under the T-forward measure. Then, we derive approximate pricing formulas for AAOs using the three-moment matching method. Furthermore, we calculate the first three conditional moments of the discrete arithmetic average, given the final value of the underlying asset, under the T-forward measure. These conditional moments can be used to improve the accuracy of the approximation of the AAO prices. The numerical results show that our three-moment matching approximations are very accurate. Additionally, the accuracy can be further improved by combining the conditioning approach with the three-moment matching method. Our procedure is also applied to the computation of deltas of AAOs.

Keywords: Arithmetic Asian options; Hull–White model; Forward measure; Moment-matching method (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:74:y:2024:i:c:s1062940824001645

DOI: 10.1016/j.najef.2024.102239

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