Geometric Asian options: valuation and calibration with stochastic volatility

Hoi Ying Wong and Ying Lok Cheung

Quantitative Finance, 2004, vol. 4, issue 3, 301-314

Abstract: This paper studies continuously sampled geometric Asian options (GAO) in a stochastic volatility economy. The underlying asset price is assumed to follow a geometric Brownian motion with stochastic volatility driven by a mean-reverting process. Semi-analytical pricing formulae for GAO are derived in a fast mean-reverting stochastic volatility economy by the means of a perturbation method. The effects of stochastic volatility on averaging type options are examined. A unified regression approach is proposed to capture smiles of some geometric Asian options and European options in one shot.

Date: 2004
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DOI: 10.1088/1469-7688/4/3/006

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