Fixed-income average options: a pricing approach based on Gaussian mean-reverting cyclical models

Belén León-Pérez () and Manuel Moreno
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Belén León-Pérez: Quant AI Lab

Annals of Operations Research, 2024, vol. 337, issue 1, No 7, 167-196

Abstract: Abstract This paper values fixed-income (discrete- and continuous-time) European Asian and Australian options. We assume that the term structure of interest rates is modelled by the specification proposed in Moreno et al. (Econ Model 72:140–150, 2018, https://doi.org/10.1016/j.econmod.2018.01.015 ). We obtain closed-form expressions for the premiums of geometric average options and, for arithmetic average options, premiums are computed by numerical methods. We also perform a sensitivity analysis with respect to different parameters for both (geometric and arithmetic) options.

Keywords: Average options; Mean-reversion; Fourier series; Option pricing; Monte Carlo simulations; Sensitivity analysis (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10479-024-05904-x

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