Pricing 'partial-average' Asian options with the binomial method Online publication date: Fri, 26-Apr-2019
by Erwinna Chendra; Kuntjoro Adji Sidarto; Muhammad Syamsuddin; Dila Puspita
International Journal of Banking, Accounting and Finance (IJBAAF), Vol. 10, No. 1, 2019
Abstract: An Asian option is path-dependent derivatives whose payoff depends on the average of the underlying asset price over a certain pre-specified period of time. There is no simple closed-form solution for arithmetic Asian option hence the development of efficient and accurate numerical methods has become critical. In this paper, a modified binomial method is presented for pricing a more common arithmetic Asian option, by averaging the asset between two time periods in the life span of the option. This option is called the 'partial-average' Asian option. Subsequently, the representative averages are used instead of the actual ones for pricing the option. The set of representative averages is constructed first by determining the maximum and the minimum averages, where other averages are calculated by dividing equally the distance between the maximum and the minimum averages. For Asian option with average strike, if the distance between two time periods is widened by shifting the second time period to the right then the price becomes lower. But if the distance is widened by shifting the first time period to the left then the price becomes higher. The algorithm is not only simple but also easy to implement.
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Banking, Accounting and Finance (IJBAAF):
Login with your Inderscience username and password:
Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.
If you still need assistance, please email subs@inderscience.com