A finite dimensional approximation for pricing moving average options

Marie Bernhart, Peter Tankov and Xavier Warin

Papers from arXiv.org

Abstract: We propose a method for pricing American options whose pay-off depends on the moving average of the underlying asset price. The method uses a finite dimensional approximation of the infinite-dimensional dynamics of the moving average process based on a truncated Laguerre series expansion. The resulting problem is a finite-dimensional optimal stopping problem, which we propose to solve with a least squares Monte Carlo approach. We analyze the theoretical convergence rate of our method and present numerical results in the Black-Scholes framework.

Date: 2010-11
New Economics Papers: this item is included in nep-cmp
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http://arxiv.org/pdf/1011.3599 Latest version (application/pdf)

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Working Paper: A finite dimensional approximation for pricing moving average options (2010)
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