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Pricing options with American-style average reset features

Author

Listed:
  • Chuang-Chang Chang
  • San-Lin Chung
  • Mark Shackleton

Abstract

This study extends the Hull and White (1993 J. Derivatives 1 21-31) binomial method to construct a trinomial model for the valuation of American-style options whose strike price can be reset to a new level. The reset criterion is conditioned upon the average underlying asset price hitting the reset barrier in a specified period although the model proposed can accommodate other features. For prices benchmarked against ordinary Asian options, we investigate the difference between a daily reset warrant and a period-average reset warrant and find that the number of time steps between observations affects the value of American-style average price options and period-average reset options.

Suggested Citation

  • Chuang-Chang Chang & San-Lin Chung & Mark Shackleton, 2004. "Pricing options with American-style average reset features," Quantitative Finance, Taylor & Francis Journals, vol. 4(3), pages 292-300.
    • Handle: RePEc:taf:quantf:v:4:y:2004:i:3:p:292-300
    DOI: 10.1088/1469-7688/4/3/005
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    Cited by:

    1. Tian-Shyr Dai & Yuh-Yuan Fang & Yuh-Dauh Lyuu, 2005. "Analytics for geometric average trigger reset options," Applied Economics Letters, Taylor & Francis Journals, vol. 12(13), pages 835-840.
    2. Guangming Xue & Bin Qin & Guohe Deng, 2018. "Valuation on an Outside-Reset Option with Multiple Resettable Levels and Dates," Complexity, Hindawi, vol. 2018, pages 1-13, April.

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