Early exercise boundary for American type of floating strike Asian option and its numerical approximation
AbstractIn this paper we generalize and analyze the model for pricing American-style Asian options due to (Hansen and Jorgensen 2000) by including a continuous dividend rate $q$ and a general method of averaging of the floating strike. We focus on the qualitative and quantitative analysis of the early exercise boundary. The first order Taylor series expansion of the early exercise boundary close to expiry is constructed. We furthermore propose an efficient numerical algorithm for determining the early exercise boundary position based on the front fixing method. Construction of the algorithm is based on a solution to a nonlocal parabolic partial differential equation for the transformed variable representing the synthesized portfolio. Various numerical results and comparisons of our numerical method and the method developed by (Dai and Kwok 2006) are presented.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0912.1321.
Date of creation: Dec 2009
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-11 (All new papers)
- NEP-CMP-2009-12-11 (Computational Economics)
- NEP-SEA-2009-12-11 (South East Asia)
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- Asbjørn T. Hansen & Peter Løchte Jørgensen, 2000. "Analytical Valuation of American-Style Asian Options," Management Science, INFORMS, vol. 46(8), pages 1116-1136, August.
- Andrea Pascucci, 2008.
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- Daniel Sevcovic & Martin Takac, 2011. "Sensitivity analysis of the early exercise boundary for American style of Asian options," Papers 1101.3071, arXiv.org.
- Tomas Bokes, 2010. "A unified approach to determining the early exercise boundary position at expiry for American style of general class of derivatives," Papers 1012.0348, arXiv.org, revised Mar 2011.
- J. D. Kandilarov & D. Sevcovic, 2011. "Comparison of Two Numerical Methods for Computation of American Type of the Floating Strike Asian Option," Papers 1106.0020, arXiv.org.
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