The Pricing of Asian Options under Stochastic Interest Rates
AbstractThe purpose of this paper is to analyse the effect of stochastic interest rates on the pricing of Asian options. It is shown that a stochastic, in contrast to a deterministic, development of the term structure of interest rates has a significant influence. The price of the underlying asset, e.g. a stock or oil, and the prices of bonds are assumed to follow correlated two dimensional Ito processes. The averages considered in the Asian options are calculated on a discrete time grid, e.g. all closing prices on Wednesdays during the lifetime of the contract. The value of an Asian option will be obtained through the application of Monte Carlo simulation, and for this purpose the stochastic processes for the basic assets need not to be severely restricted. However to make comparison with published results originating from models with deterministic interest rates we will stay within the setting of a Gaussian framework.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 323.
Date of creation: May 1995
Date of revision: Dec 1995
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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Asian Options; Forward Risk Adjusted Measure; Monte Carlo Simulation;
Other versions of this item:
- J. A. Nielsen & K. Sandmann, 1996. "The pricing of Asian options under stochastic interest rates," Applied Mathematical Finance, Taylor & Francis Journals, vol. 3(3), pages 209-236.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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