General lattice methods for arithmetic Asian options

Anna Maria Gambaro, Ioannis Kyriakou and Gianluca Fusai

European Journal of Operational Research, 2020, vol. 282, issue 3, 1185-1199

Abstract: In this research, we develop a new discrete-time model approach with flexibly changeable driving dynamics for pricing Asian options, with possible early exercise, and a fixed or floating strike price. These options are ubiquitous in financial markets but can also be recast in the framework of real options. Moreover, we derive an accurate lower bound to the price of the European Asian options under stochastic volatility. We also survey theoretical aspects; more specifically, we prove that our tree method for the European Asian option in the binomial model is unconditionally convergent to the continuous-time equivalent. Numerical experiments confirm smooth, monotonic convergence, highly precise performance, and robustness with respect to changing driving dynamics and contract features.

Keywords: Finance; Discrete-time model; Asian option; Early exercise; Stochastic volatility (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:282:y:2020:i:3:p:1185-1199

DOI: 10.1016/j.ejor.2019.10.026

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