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Efficient and accurate quadratic approximation methods for pricing Asian strike options

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  • Chuang-Chang Chang
  • Chueh-Yung Tsao
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    Abstract

    This study is on valuing Asian strike options and presents efficient and accurate quadratic approximation methods that work extremely well, both with regard to the volatility of a wide range of underlying assets, and longer average time windows. We demonstrate that most of the well-known quadratic approximation methods used in the literature for pricing Asian strike options are special cases of our model, with the numerical results demonstrating that our method significantly outperforms the other quadratic approximation methods examined here. Using our method for the calculation of hundreds of Asian strike options, the pricing errors (in terms of the root mean square errors) are reasonably small. Compared with the Monte Carlo benchmark method, our method is shown to be rapid and accurate. We further extend our method to the valuing of quanto forward-starting Asian strike options, with the pricing accuracy of these options being largely the same as the pricing of plain vanilla Asian strike options.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/14697680903369492
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 11 (2011)
    Issue (Month): 5 ()
    Pages: 729-748

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    Handle: RePEc:taf:quantf:v:11:y:2011:i:5:p:729-748

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    Related research

    Keywords: Asian options; Derivatives pricing; Value at Risk; Genetic algorithms; Wavelets in finance;

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