Efficient Pricing of Discrete Asian Options

W.W. Hsu and Y.-D. Lyuu (Taiwan)

Keywords

Option pricing, binomial model, multinomial model, Dis crete Asian option, Lagrange multiplier, lattice

Abstract

Asian options are popular path-dependent financial deriva tives. This paper uses lattices to price Asian options that are discretely monitored, which is the case in practice in con trast to the continuously monitored version usually encoun tered in the literature. This paper presents the first prov ably quadratic-time convergent lattice algorithm for pricing European-style discretely monitored Asian options. It is the most efficient lattice algorithm with convergence guar antees. The algorithm relies on the Lagrange multipliers to choose the number of states for each node of the lat tice. Extensive numerical experiments and comparisons with many existing numerical methods confirm the per formance claims and the competitiveness of our algorithm. Somewhat surprisingly, this result places European-style discretely monitored Asian options in the same complexity class as vanilla options.

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