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Pricing arithmetic Asian and Amerasian options: A diffusion operator integral expansion approach

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  • Kailin Ding
  • Zhenyu Cui
  • Xiaoguang Yang

Abstract

In this paper, we propose a new explicit series expansion formula for the price of an arithmetic Asian option under the Black–Scholes model and Merton's jump‐diffusion model. The method is based on an equivalence in law relation together with the diffusion operator integral method proposed by Heath and Platen. The method yields explicit series expansion formula for the Asian options' prices. The theoretical convergence of the expansion to the true value is established. We also consider the American Asian option (i.e., Amerasian option) and derive the corresponding expansion formula through the early exercise premium representation. Numerical results illustrate the accuracy and efficiency of the method as compared with benchmarks in the literature.

Suggested Citation

  • Kailin Ding & Zhenyu Cui & Xiaoguang Yang, 2023. "Pricing arithmetic Asian and Amerasian options: A diffusion operator integral expansion approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(2), pages 217-241, February.
    • Handle: RePEc:wly:jfutmk:v:43:y:2023:i:2:p:217-241
    DOI: 10.1002/fut.22387
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    2. Andrey Itkin & Yerkin Kitapbayev, 2024. "Semi-analytical pricing of options written on SOFR futures," Papers 2409.04903, arXiv.org, revised Oct 2024.

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