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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
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    File URL: http://dx.doi.org/10.1287/mnsc.39.10.1202
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    Citations

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    Cited by:

    1. Sander Willems, 2018. "Asian Option Pricing with Orthogonal Polynomials," Papers 1802.01307, arXiv.org.
    2. Jean-Guy Simonato, 2011. "Johnson binomial trees," Quantitative Finance, Taylor & Francis Journals, vol. 11(8), pages 1165-1176.
    3. Asbjørn T. Hansen & Peter Løchte Jørgensen, 2000. "Analytical Valuation of American-Style Asian Options," Management Science, INFORMS, vol. 46(8), pages 1116-1136, August.
    4. D. Andricopoulos, Ari & Widdicks, Martin & Newton, David P. & Duck, Peter W., 2007. "Extending quadrature methods to value multi-asset and complex path dependent options," Journal of Financial Economics, Elsevier, vol. 83(2), pages 471-499, February.
    5. Jin-Chuan Duan & Jean-Guy Simonato, 1998. "Empirical Martingale Simulation for Asset Prices," Management Science, INFORMS, vol. 44(9), pages 1218-1233, September.
    6. Manuel Moreno & Javier F. Navas, 2003. "Australian Asian Options," Working Papers 28, Barcelona Graduate School of Economics.
    7. Vicky Henderson & David Hobson & William Shaw & Rafal Wojakowski, 2007. "Bounds for in-progress floating-strike Asian options using symmetry," Annals of Operations Research, Springer, vol. 151(1), pages 81-98, April.
    8. Jin-Chuan Duan & Jean-Guy Simonato, 1995. "Empirical Martingale Simulation for Asset Prices," CIRANO Working Papers 95s-43, CIRANO.
    9. Hideharu Funahashi & Masaaki Kijima, 2013. "An Extension of the Chaos Expansion Approximation for the Pricing of Exotic Basket Options," KIER Working Papers 857, Kyoto University, Institute of Economic Research.
    10. Louis-Pierre Arguin & Nien-Lin Liu & Tai-Ho Wang, 2017. "Most-likely-path in Asian option pricing under local volatility models," Papers 1706.02408, arXiv.org.
    11. Renyuan Shao & Brian Roe, 2003. "The design and pricing of fixed‐ and moving‐window contracts: An application of Asian‐Basket option pricing methods to the hog‐finishing sector," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(11), pages 1047-1073, November.
    12. Dan Pirjol & Lingjiong Zhu, 2017. "Asymptotics for the Discrete-Time Average of the Geometric Brownian Motion and Asian Options," Papers 1706.09659, arXiv.org.
    13. Leunglung Chan & Song-Ping Zhu, 2014. "An exact and explicit formula for pricing Asian options with regime switching," Papers 1407.5091, arXiv.org.
    14. Dan Pirjol & Lingjiong Zhu, 2016. "Short Maturity Asian Options in Local Volatility Models," Papers 1609.07559, arXiv.org.
    15. Manuel Moreno & Javier F. Navas, 2008. "Australian Options," Australian Journal of Management, Australian School of Business, vol. 33(1), pages 69-93, June.
    16. Choi, Hyun-Woo & Kim, In Joon & Kim, Tong Suk, 2002. "Contingent claims valuation of optional calling plan contracts in telephone industry," International Review of Financial Analysis, Elsevier, vol. 11(4), pages 433-448.

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