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Sensitivity analysis of the early exercise boundary for American style of Asian options

  • Daniel Sevcovic
  • Martin Takac
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    In this paper we analyze American style of floating strike Asian call options belonging to the class of financial derivatives whose payoff diagram depends not only on the underlying asset price but also on the path average of underlying asset prices over some predetermined time interval. The mathematical model for the option price leads to a free boundary problem for a parabolic partial differential equation. Applying fixed domain transformation and transformation of variables we develop an efficient numerical algorithm based on a solution to a non-local parabolic partial differential equation for the transformed variable representing the synthesized portfolio. For various types of averaging methods we investigate the dependence of the early exercise boundary on model parameters.

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    File URL: http://arxiv.org/pdf/1101.3071
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    Paper provided by arXiv.org in its series Papers with number 1101.3071.

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    Date of creation: Jan 2011
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    Handle: RePEc:arx:papers:1101.3071
    Contact details of provider: Web page: http://arxiv.org/

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    1. Daniel Sevcovic, 2008. "Transformation methods for evaluating approximations to the optimal exercise boundary for linear and nonlinear Black-Scholes equations," Papers 0805.0611, arXiv.org.
    2. Andrea Pascucci, 2008. "Free boundary and optimal stopping problems for American Asian options," Finance and Stochastics, Springer, vol. 12(1), pages 21-41, January.
    3. Tomas Bokes & Daniel Sevcovic, 2009. "Early exercise boundary for American type of floating strike Asian option and its numerical approximation," Papers 0912.1321, arXiv.org.
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