Early exercise boundary for American type of floating strike Asian option and its numerical approximation
In this paper we generalize and analyze the model for pricing American-style Asian options due to (Hansen and Jorgensen 2000) by including a continuous dividend rate $q$ and a general method of averaging of the floating strike. We focus on the qualitative and quantitative analysis of the early exercise boundary. The first order Taylor series expansion of the early exercise boundary close to expiry is constructed. We furthermore propose an efficient numerical algorithm for determining the early exercise boundary position based on the front fixing method. Construction of the algorithm is based on a solution to a nonlocal parabolic partial differential equation for the transformed variable representing the synthesized portfolio. Various numerical results and comparisons of our numerical method and the method developed by (Dai and Kwok 2006) are presented.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrea Pascucci, 2008.
"Free boundary and optimal stopping problems for American Asian options,"
Finance and Stochastics,
Springer, vol. 12(1), pages 21-41, January.
- Andrea, Pascucci, 2007. "Free boundary and optimal stopping problems for American Asian options," MPRA Paper 4766, University Library of Munich, Germany.
- Asbjørn T. Hansen & Peter Løchte Jørgensen, 2000. "Analytical Valuation of American-Style Asian Options," Management Science, INFORMS, vol. 46(8), pages 1116-1136, August.
- Geske, Robert & Johnson, Herb E, 1984. " The American Put Option Valued Analytically," Journal of Finance, American Finance Association, vol. 39(5), pages 1511-1524, December.
- Rachel Kuske & Joseph Keller, 1998. "Optimal exercise boundary for an American put option," Applied Mathematical Finance, Taylor & Francis Journals, vol. 5(2), pages 107-116.
- Daniel Sevcovic, 2007. "An iterative algorithm for evaluating approximations to the optimal exercise boundary for a nonlinear Black-Scholes equation," Papers 0710.5301, arXiv.org. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:arx:papers:0912.1321. 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: (arXiv administrators)
If references are entirely missing, you can add them using this form.