Asian options versus vanilla options: a boundary analysis

George L. Ye

Journal of Risk Finance, 2008, vol. 9, issue 2, 188-199

Abstract: Purpose - The purpose of the paper is to correct a commonly mistaken notion that an Asian option is always cheaper than its plain vanilla European counterpart in a general setting. Design/methodology/approach - The paper shows that by letting volatility go to zero, the lower bounds of Asian options and vanilla options are derived. Those bounds are then compared. Findings - The paper finds that the notion can be violated for call options when the dividend yield of the underlying stock is higher than the interest rate, as well as for put options when the dividend yield of the underlying stock is lower than the interest rate. Research limitations/implications - The approach used in this paper, boundary analysis, can be applied to other exotic options. Practical implications - The results in the paper may affect decisions on trading Asian options. Originality/value - The paper will be of value to those interested in using/pricing/hedging Asian options.

Keywords: Pricing; Stock options; Asset valuation; Risk analysis (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265940810853931

DOI: 10.1108/15265940810853931

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