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A finite dimensional approximation for pricing moving average options

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  • Marie Bernhart
  • Peter Tankov
  • Xavier Warin

Abstract

We propose a method for pricing American options whose pay-off depends on the moving average of the underlying asset price. The method uses a finite dimensional approximation of the infinite-dimensional dynamics of the moving average process based on a truncated Laguerre series expansion. The resulting problem is a finite-dimensional optimal stopping problem, which we propose to solve with a least squares Monte Carlo approach. We analyze the theoretical convergence rate of our method and present numerical results in the Black-Scholes framework.

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File URL: http://arxiv.org/pdf/1011.3599
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Paper provided by arXiv.org in its series Papers with number 1011.3599.

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Date of creation: Nov 2010
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Handle: RePEc:arx:papers:1011.3599

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  1. Pavel V. Gapeev & Markus Reiß, 2005. "An optimal stopping problem in a diffusion-type model with delay," SFB 649 Discussion Papers SFB649DP2005-005, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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Cited by:
  1. Xavier Warin, 2012. "Hedging Swing contract on gas markets," Papers 1208.5303, arXiv.org.

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