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An efficient and stable method for short maturity Asian options

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Listed:
  • Rupak Chatterjee
  • Zhenyu Cui
  • Jiacheng Fan
  • Mingzhe Liu

Abstract

In this paper, we develop a Markov chain‐based approximation method to price arithmetic Asian options for short maturities under the case of geometric Brownian motion. It has the advantage of being a closed‐form approximation involving only matrices. It is an accurate, efficient, and stable method for the pricing and hedging of short maturity arithmetic Asian options for which previous methods in the literature have shown either slower convergence or instabilities in hedging parameters. We demonstrate that this method is as good as and sometimes better than existing approximation methods in the literature.

Suggested Citation

  • Rupak Chatterjee & Zhenyu Cui & Jiacheng Fan & Mingzhe Liu, 2018. "An efficient and stable method for short maturity Asian options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1470-1486, December.
    • Handle: RePEc:wly:jfutmk:v:38:y:2018:i:12:p:1470-1486
    DOI: 10.1002/fut.21956
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    References listed on IDEAS

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    Cited by:

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    3. Ding, Kailin & Ning, Ning, 2021. "Markov chain approximation and measure change for time-inhomogeneous stochastic processes," Applied Mathematics and Computation, Elsevier, vol. 392(C).

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