An efficient and stable method for short maturity Asian options

Rupak Chatterjee, Zhenyu Cui, Jiacheng Fan, Mingzhe Liu

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

In this paper, we develop a Markov chain-based approximation method to price arithmetic Asian options for short maturities under the case of geometric Brownian motion. It has the advantage of being a closed-form approximation involving only matrices. It is an accurate, efficient, and stable method for the pricing and hedging of short maturity arithmetic Asian options for which previous methods in the literature have shown either slower convergence or instabilities in hedging parameters. We demonstrate that this method is as good as and sometimes better than existing approximation methods in the literature.

Original languageEnglish
Pages (from-to)1470-1486
Number of pages17
JournalJournal of Futures Markets
Volume38
Issue number12
DOIs
StatePublished - Dec 2018

Keywords

  • Markov chain
  • arithmetic Asian option
  • stable Greeks
  • volatility regime

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