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The Valuation of Path Dependent Contracts on the Average

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Author Info

  • Peter Ritchken

    (Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)

  • L. Sankarasubramanian

    (School of Business Administration, University of Southern California, Los Angeles, California 90089-1421)

  • Anand M. Vijh

    (School of Business Administration, University of Southern California, Los Angeles, California 90089-1421)

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    Abstract

    This article values option contracts based on the average price realized over a finite time horizon. Such contracts are of importance to traders who periodically transact in spot markets and who require protection from adverse moves in their total accrued costs realized over their trading horizons. Explicit valuation models for pricing a variety of path dependent contracts based on geometric and arithmetic averages are developed. The early exercise features of American contracts are investigated, and it is shown that this feature has significant value.

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    File URL: http://dx.doi.org/10.1287/mnsc.39.10.1202
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 39 (1993)
    Issue (Month): 10 (October)
    Pages: 1202-1213

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    Handle: RePEc:inm:ormnsc:v:39:y:1993:i:10:p:1202-1213

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    Related research

    Keywords: option pricing; American contracts; path dependence issues; arithmetic and geometric means;

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    Cited by:
    1. Hideharu Funahashi & Masaaki Kijima, 2013. "An Extension of the Chaos Expansion Approximation for the Pricing of Exotic Basket Options," KIER Working Papers 857, Kyoto University, Institute of Economic Research.
    2. Manuel Moreno & Javier F. Navas, 2003. "Australian Asian Options," Working Papers 28, Barcelona Graduate School of Economics.
    3. Shao, Renyuan & Roe, Brian E., 2002. "The Design And Pricing Of Fixed And Moving Window Contracts: An Application Of Asian-Basket Option Pricing Methods To The Hog Finishing Sector," 2002 Annual meeting, July 28-31, Long Beach, CA 19823, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Choi, Hyun-Woo & Kim, In Joon & Kim, Tong Suk, 2002. "Contingent claims valuation of optional calling plan contracts in telephone industry," International Review of Financial Analysis, Elsevier, vol. 11(4), pages 433-448.
    5. Jin-Chuan Duan & Jean-Guy Simonato, 1995. "Empirical Martingale Simulation for Asset Prices," CIRANO Working Papers 95s-43, CIRANO.
    6. D. Andricopoulos, Ari & Widdicks, Martin & Newton, David P. & Duck, Peter W., 2007. "Extending quadrature methods to value multi-asset and complex path dependent options," Journal of Financial Economics, Elsevier, vol. 83(2), pages 471-499, February.

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