Jin E. Zhang (Department of Economics and Finance, City University of Hong Kong)
Abstract
This paper studies the pricing of Arithmetic Asian options with continuous sampling. We derive a new analytical approximate formula to price and hedge the Arithmetic Asian options. The correlation to the analytical formula can be evaluated by solving a Partial Differential Equation (PDE) numerically. Numerical experiments show that the error of our semi-analytical approach, i.e., analytical approximation with the correction, is at least of the order of 10-5, for the options with wide range of parameters tested in this paper. The accuracy can be easily pushed even higher by decreasing the grid size for the computation of the correction term. The CPU time taken for the numerical computation is one to two seconds. Our method is more accurate than any existing methods in the literature, and faster than other PDE methods. With the error well-controlled, our results can be used as a benchmark to justify the error computed by other approximation methods, including Monte Carlo simulation.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number
231.
Length: 22 pages Date of creation: Mar 1999 Date of revision: Handle: RePEc:eab:financ:231
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200 Web page: http://www.eaber.org More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Sam Engele).
Find related papers by JEL classification: G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
References listed on IDEAS 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.:
Cited by: (explanations, 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.)