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Fixed-income average options: a pricing approach based on Gaussian mean-reverting cyclical models

Author

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  • Belén León-Pérez

    (Quant AI Lab)

  • Manuel Moreno

    (University of Castilla-La Mancha)

Abstract

This paper values fixed-income (discrete- and continuous-time) European Asian and Australian options. We assume that the term structure of interest rates is modelled by the specification proposed in Moreno et al. (Econ Model 72:140–150, 2018, https://doi.org/10.1016/j.econmod.2018.01.015 ). We obtain closed-form expressions for the premiums of geometric average options and, for arithmetic average options, premiums are computed by numerical methods. We also perform a sensitivity analysis with respect to different parameters for both (geometric and arithmetic) options.

Suggested Citation

  • Belén León-Pérez & Manuel Moreno, 2024. "Fixed-income average options: a pricing approach based on Gaussian mean-reverting cyclical models," Annals of Operations Research, Springer, vol. 337(1), pages 167-196, June.
    • Handle: RePEc:spr:annopr:v:337:y:2024:i:1:d:10.1007_s10479-024-05904-x
    DOI: 10.1007/s10479-024-05904-x
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    References listed on IDEAS

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