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Prices and sensitivities of Asian options: A survey

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  • Boyle, Phelim
  • Potapchik, Alexander
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    Abstract

    Asian options are hard to price both analytically and numerically. Even though they have been the focus of much attention in recent years, there is no single technique which is widely accepted to price Asian options for all choices of market parameters. For hedging purposes, the estimation of the price sensitivities is often as important as the evaluation of the prices themselves. This paper provides a survey of current methods for pricing Asian options and computing their sensitivities to the key input parameters. The methods discussed include: Monte Carlo simulation, the finite difference approach and various quasi analytical approaches and approximations. We discuss practical numerical issues that arise in implementing these methods. The paper compares the accuracy and efficiency of the different approaches and offers some general conclusions.

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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 42 (2008)
    Issue (Month): 1 (February)
    Pages: 189-211

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    Handle: RePEc:eee:insuma:v:42:y:2008:i:1:p:189-211

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    Web page: http://www.elsevier.com/locate/inca/505554

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    1. Eric Fournié & Jean-Michel Lasry & Pierre-Louis Lions & Jérôme Lebuchoux, 2001. "Applications of Malliavin calculus to Monte-Carlo methods in finance. II," Finance and Stochastics, Springer, vol. 5(2), pages 201-236.
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    16. Eric Fournié & Jean-Michel Lasry & Pierre-Louis Lions & Jérôme Lebuchoux & Nizar Touzi, 1999. "Applications of Malliavin calculus to Monte Carlo methods in finance," Finance and Stochastics, Springer, vol. 3(4), pages 391-412.
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    Cited by:
    1. Dingeç, Kemal Dinçer & Hörmann, Wolfgang, 2013. "Control variates and conditional Monte Carlo for basket and Asian options," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 421-434.
    2. Dai, Min & Li, Peifan & Zhang, Jin E., 2010. "A lattice algorithm for pricing moving average barrier options," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(3), pages 542-554, March.
    3. Ewald, Christian-Oliver & Menkens, Olaf & Hung Marten Ting, Sai, 2013. "Asian and Australian options: A common perspective," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(5), pages 1001-1018.
    4. Dingeç, Kemal Dinçer & Hörmann, Wolfgang, 2012. "A general control variate method for option pricing under Lévy processes," European Journal of Operational Research, Elsevier, Elsevier, vol. 221(2), pages 368-377.

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