Pricing discretely monitored asian options by maturity randomization

Gianluca Fusai, Daniele Marazzina, Marina Marena

Research output: Contribution to journalArticlepeer-review

Abstract

We present a new methodology based on maturity randomization to price discretely monitored arithmetic Asian options when the underlying asset evolves according to a generic Lévy process. Our randomization technique considers the option expiry to be a random variable distributed according to a geometric distribution of a parameter independent of the underlying process. This allows one to transform the pricing backward procedure into a set of independent integral equations. Numerical procedures for a fast and accurate solution of the pricing problem are provided.

Original languageEnglish
Pages (from-to)383-403
Number of pages21
JournalSIAM Journal on Financial Mathematics
Volume2
Issue number1
DOIs
Publication statusPublished - 2011

Keywords

  • Asian option
  • Discrete monitoring
  • Fast Fourier transform
  • Integral equation
  • Lévy process
  • Option pricing
  • Quadrature formula

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