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A finite dimensional approximation for pricing moving average options

Author

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  • Marie Bernhart
  • Peter Tankov
  • Xavier Warin

Abstract

We propose a method for pricing American options whose pay-off depends on the moving average of the underlying asset price. The method uses a finite dimensional approximation of the infinite-dimensional dynamics of the moving average process based on a truncated Laguerre series expansion. The resulting problem is a finite-dimensional optimal stopping problem, which we propose to solve with a least squares Monte Carlo approach. We analyze the theoretical convergence rate of our method and present numerical results in the Black-Scholes framework.

Suggested Citation

  • Marie Bernhart & Peter Tankov & Xavier Warin, 2010. "A finite dimensional approximation for pricing moving average options," Papers 1011.3599, arXiv.org.
  • Handle: RePEc:arx:papers:1011.3599
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    File URL: http://arxiv.org/pdf/1011.3599
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    References listed on IDEAS

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    1. Gapeev, Pavel V. & Reiß, Markus, 2006. "An optimal stopping problem in a diffusion-type model with delay," Statistics & Probability Letters, Elsevier, vol. 76(6), pages 601-608, March.
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    Cited by:

    1. Enrico Biffis & Beniamin Goldys & Cecilia Prosdocimi, 2015. "A pricing formula for delayed claims: Appreciating the past to value the future," Papers 1505.04914, arXiv.org.
    2. Xavier Warin, 2012. "Hedging Swing contract on gas markets," Papers 1208.5303, arXiv.org.

    More about this item

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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