Pricing of Asian-type and basket options via bounds

A. Novikov, S. Alexander, N. Kordzakhia, T. Ling

    Research output: Contribution to journalArticle

    Abstract

    This paper sets out to provide a general framework for the pricing of average-type options via lower and upper bounds. This class of options includes Asian, basket, and options on the volume-weighted average price. The use of lower and upper bounds is proposed in response to the inherent difficulty in finding analytical representations for the true price of these options and the requirement for numerical procedures to be fast and efficient. We demonstrate that in some cases lower bounds allow for the dimensionality of the problem to be reduced and that these methods provide reasonable approximations to the price of the option.
    Original languageEnglish
    Pages (from-to)94-106
    Number of pages13
    JournalTheory of Probability and its Applications
    Volume61
    Issue number1
    DOIs
    Publication statusPublished - 2017

    Keywords

    • Asian options
    • basket options
    • lower and upper bounds
    • volume-weighted average prices (VWAP)
    • lévy processes

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