Application of a High-Order Asymptotic Expansion Scheme to Long-Term Currency Options
Recently, not only academic researchers but also many practitioners have used the methodology so-called "an asymptotic expansion method" in their proposed techniques for a variety of financial issues. e.g. pricing or hedging complex derivatives under high-dimensional stochastic environments. This methodology is mathematically justified by Watanabe theory(Watanabe , Yoshida [1992a,b]) in Malliavin calculus and essentially based on the framework initiated by Kunitomo and Takahashi , Takahashi [1995,1999] in a financial context. In practical applications, it is desirable to investigate the accuracy and stability of the method especially with expansion up to high orders in situations where the underlying processes are highly volatile as seen in recent financial markets. After Takahashi [1995,1999] and Takahashi and Takehara  had provided explicit formulas for the expansion up to the third order, Takahashi, Takehara and Toda  develops general computation schemes and formulas for an arbitrary-order expansion under general diffusion-type stochastic environments. In this paper, we describe them in a simple setting to illustrate thier key idea, and to demonstrate their effectiveness apply them to pricing long-term currency options under a cross-currency Libor market model and a general stochastic volatility of a spot exchange rate with maturities up to twenty years.
|Date of creation:||Jul 2010|
|Contact details of provider:|| Postal: Hongo 7-3-1, Bunkyo-ku, Tokyo 113-0033|
Web page: http://www.cirje.e.u-tokyo.ac.jp/index.html
More information through EDIRC
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.:
- Naoto Kunitomo & Akihiko Takahashi, 2001. "The Asymptotic Expansion Approach to the Valuation of Interest Rate Contingent Claims," Mathematical Finance, Wiley Blackwell, vol. 11(1), pages 117-151.
- Akihiko Takahashi & Nakahiro Yoshida, 2005. "Monte Carlo Simulation with Asymptotic Method," CIRJE F-Series CIRJE-F-335, CIRJE, Faculty of Economics, University of Tokyo.
- Yoshifumi Muroi, 2005. "Pricing contingent claims with credit risk: Asymptotic expansion approach," Finance and Stochastics, Springer, vol. 9(3), pages 415-427, 07.
When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2010cf753. 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: (CIRJE administrative office)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.