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Pricing bounds for discrete arithmetic Asian options under Lévy models

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  • Lemmens, D.
  • Liang, L.Z.J.
  • Tempere, J.
  • De Schepper, A.
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    Abstract

    Analytical bounds for Asian options are almost exclusively available in the Black–Scholes framework. In this paper we derive bounds for the price of a discretely monitored arithmetic Asian option when the underlying asset follows an arbitrary Lévy process. Explicit formulas are given for Kou’s model, Merton’s model, the normal inverse Gaussian model, the CGMY model and the variance gamma model. The results are compared with the comonotonic upper bound, existing numerical results, Monte carlo simulations and in the case of the variance gamma model with an existing lower bound. The method outlined here provides lower and upper bounds that are quick to evaluate, and more accurate than existing bounds.

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 389 (2010)
    Issue (Month): 22 ()
    Pages: 5193-5207

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    Handle: RePEc:eee:phsmap:v:389:y:2010:i:22:p:5193-5207

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Asian options; Analytical bounds; Lévy models;

    References

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    Cited by:
    1. Alexander Novikov & Nino Kordzakhia, 2013. "On lower and upper bounds for Asian-type options: a unified approach," Papers 1309.2383, arXiv.org.

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