An exact and explicit formula for pricing Asian options with regime switching

Leunglung Chan and Song-Ping Zhu

Papers from arXiv.org

Abstract: This paper studies the pricing of European-style Asian options when the price dynamics of the underlying risky asset are assumed to follow a Markov- modulated geometric Brownian motion; that is, the appreciation rate and the volatility of the underlying risky asset depend on unobservable states of the economy described by a continuous-time hidden Markov process. We derive the exact, explicit and closed-form solutions for European-style Asian options in a two-state regime switching model.

Date: 2014-07
New Economics Papers: this item is included in nep-sea
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