On the Valuation of Discrete Asian Options in High Volatility Environments

Sascha Desmettre and Jörg Wenzel

Applied Mathematical Finance, 2021, vol. 28, issue 6, 508-533

Abstract: In this paper, we are concerned with the Monte Carlo valuation of discretely sampled arithmetic and geometric average options in the Black-Scholes model and the stochastic volatility model of Heston in high volatility environments. To this end, we examine the limits and convergence rates of asset prices in these models when volatility parameters tend to infinity. We observe, on the one hand, that asset prices, as well as their arithmetic means converge to zero almost surely, while the respective expectations are constantly equal to the initial asset price. On the other hand, the expectation of geometric means of asset prices converges to zero. Moreover, we elaborate on the direct consequences for option prices based on such means and illustrate the implications of these findings for the design of efficient Monte-Carlo valuation algorithms. As a suitable control variate, we need among others the price of such discretely sampled geometric Asian options in the Heston model, for which we derive a closed-form solution.

Date: 2021
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DOI: 10.1080/1350486X.2022.2108858

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