A Moment Matching Approach To The Valuation Of A Volume Weighted Average Price Option
In this paper we develop a method to find the price of several options whose payoff depends on a volume weighted average price (VWAP). Fixed and floating strike VWAP, together with digital VWAP contracts are considered. Throughout we assume that the stock follows a geometric Brownian motion and the rate of trades evolves as a mean reverting process. It is assumed that the VWAP at the final time has a lognormal distribution. The parameters of the approximating lognormal distribution are obtained by matching the first two moments of the volume weighted average price with a lognormal process. A price is then obtained for the fixed strike and digital options when the market price of risk is a constant. We concentrate on the price for calls, prices for puts can be obtained in an analogous manner.
Volume (Year): 10 (2007)
Issue (Month): 01 ()
|Contact details of provider:|| Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml |
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:10:y:2007:i:01:p:95-110. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim)
If references are entirely missing, you can add them using this form.