Short Maturity Forward Start Asian Options in Local Volatility Models

Dan Pirjol, Jing Wang and Lingjiong Zhu

Applied Mathematical Finance, 2019, vol. 26, issue 3, 187-221

Abstract: We study the short maturity asymptotics for prices of forward start Asian options under the assumption that the underlying asset follows a local volatility model. We obtain asymptotics for the cases of out-of-the-money, in-the-money, and at-the-money, considering both fixed strike and floating Asian options. The exponential decay of the price of an out-of-the-money forward start Asian option is handled using large deviations theory, and is controlled by a rate function which is given by a double-layer optimization problem. In the Black-Scholes model, the calculation of the rate function is simplified further to the solution of a non-linear equation. We obtain closed form for the rate function, as well as its asymptotic behavior when the strike is extremely large, small, or close to the initial price of the underlying asset.

Date: 2019
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DOI: 10.1080/1350486X.2019.1584533

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