23 Novembre, 2016 12:00 in punto

Sezione di Finanza Quantitativa

Advancing the universality of pricing methods for Asian options to any underlying process – applications in financial markets

Ioannis Kyriakou, Cass Business School

Aula Seminari III piano

We propose an accurate method for pricing arithmetic Asian options in a general model setting by means of a lower bound approximation. In particular, we derive analytical expressions for the lower bound in the Fourier domain. This is then recovered by a single univariate inversion and sharpened using an optimization technique.
Our proposed method can be applied to computing the prices and price sensitivities of Asian options with fixed or floating strike price, discrete or continuous averaging, under a wide range of stochastic dynamic models, including exponential Lévy, mean-reverting, affine stochastic volatility models, and the constant elasticity of variance diffusion. We present evidence of notable performance and robustness of our optimized lower bound for different test cases.
We then focus on applications in financial markets where the use of Asian options is prevalent, such as energy commodity and freight markets, exploiting the analytical tractability, computational competence and precision of our valuation framework. Asian options are favoured by risk managers being cost-saving hedging instruments and due to their ability to mitigate problems relating to market manipulation of the underlying in thinly traded markets.