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The Valuation of Path Dependent Contracts on the Average

Author

Listed:
  • Peter Ritchken

    (Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)

  • L. Sankarasubramanian

    (School of Business Administration, University of Southern California, Los Angeles, California 90089-1421)

  • Anand M. Vijh

    (School of Business Administration, University of Southern California, Los Angeles, California 90089-1421)

Abstract

This article values option contracts based on the average price realized over a finite time horizon. Such contracts are of importance to traders who periodically transact in spot markets and who require protection from adverse moves in their total accrued costs realized over their trading horizons. Explicit valuation models for pricing a variety of path dependent contracts based on geometric and arithmetic averages are developed. The early exercise features of American contracts are investigated, and it is shown that this feature has significant value.

Suggested Citation

  • Peter Ritchken & L. Sankarasubramanian & Anand M. Vijh, 1993. "The Valuation of Path Dependent Contracts on the Average," Management Science, INFORMS, vol. 39(10), pages 1202-1213, October.
    • Handle: RePEc:inm:ormnsc:v:39:y:1993:i:10:p:1202-1213
    DOI: 10.1287/mnsc.39.10.1202
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