A finite dimensional approximation for pricing moving average options

Marie Bernhart (), Peter Tankov and Xavier Warin ()
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Marie Bernhart: LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique, EDF - EDF
Xavier Warin: EDF - EDF, FiME Lab - Laboratoire de Finance des Marchés d'Energie - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CREST - EDF R&D - EDF R&D - EDF - EDF

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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.

Keywords: American options; indexed swing options; moving average; finite-dimensional approximation; Laguerre polynomial; least squares Monte Carlo (search for similar items in EconPapers)
Date: 2010-11
Note: View the original document on HAL open archive server: https://hal.science/hal-00554216v1
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Citations: View citations in EconPapers (2)

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