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Implied Volatility From Asian Options Via Monte Carlo Methods



    () (School of Economics and Trade, Hunan University, 410079, Changsha, China)


    () (School of Mathematical Science, University College Cork, Cork, Ireland;
    Centre for Dynamic Macroeconomic Analysis, University of St. Andrews, St. Andrews, KY16 9AL, UK)


    () (Department of Economics and Finance, Goethe University of Frankfurt, Merton Str. 17/21, 60054 Frankfurt, Germany)


We discuss how implied volatilities for OTC traded Asian options can be computed by combining Monte Carlo techniques with the Newton method in order to solve nonlinear equations. The method relies on accurate and fast computation of the corresponding vegas of the option. In order to achieve this we propose the use of logarithmic derivatives instead of the classical approach. Our simulations document that the proposed method shows far better results than the classical approach. Furthermore we demonstrate how numerical results can be improved by localization.

Suggested Citation

  • Zhaojun Yang & Christian-Oliver Ewald & Yajun Xiao, 2009. "Implied Volatility From Asian Options Via Monte Carlo Methods," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 153-178.
  • Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:02:n:s021902490900518x
    DOI: 10.1142/S021902490900518X

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    References listed on IDEAS

    1. Higham,Desmond J., 2004. "An Introduction to Financial Option Valuation," Cambridge Books, Cambridge University Press, number 9780521547574, December.
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