Stratified approximations for the pricing of options on average

Nicolas Privault and Jiadong Yu

Journal of Computational Finance

Abstract: ABSTRACT We propose to use stratified approximations based on the gamma and lognormal distributions for the pricing of options on average, such as Asian options and bond prices in the Dothan model. We show that this approach improves on standard numerical approximation methods and is not subject to the instabilities encountered with closed-form integral expressions.

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