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.
Description:
INTERNATIOANL JOURNAL OF BANKING, ACCOUNTING AND FINANCE; Vol.10, No.1, 2019. p. 101-116.