The Valuation of Path Dependent Contracts on the Average

Peter Ritchken, L. Sankarasubramanian and Anand M. Vijh
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Peter Ritchken: Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106
L. Sankarasubramanian: School of Business Administration, University of Southern California, Los Angeles, California 90089-1421
Anand M. Vijh: School of Business Administration, University of Southern California, Los Angeles, California 90089-1421

Management Science, 1993, vol. 39, issue 10, 1202-1213

Abstract: This article values option contracts based on the average price realized over a finite time horizon. Such contracts are of importance to traders who periodically transact in spot markets and who require protection from adverse moves in their total accrued costs realized over their trading horizons. Explicit valuation models for pricing a variety of path dependent contracts based on geometric and arithmetic averages are developed. The early exercise features of American contracts are investigated, and it is shown that this feature has significant value.

Keywords: option pricing; American contracts; path dependence issues; arithmetic and geometric means (search for similar items in EconPapers)
Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:39:y:1993:i:10:p:1202-1213

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