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A Moment Matching Approach To The Valuation Of A Volume Weighted Average Price Option

Author

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  • ANTONY WILLIAM STACE

    (Department of Mathematics, University of Queensland, Brisbane, Queensland 4072, Australia)

Abstract

In this paper we develop a method to find the price of several options whose payoff depends on a volume weighted average price (VWAP). Fixed and floating strike VWAP, together with digital VWAP contracts are considered. Throughout we assume that the stock follows a geometric Brownian motion and the rate of trades evolves as a mean reverting process. It is assumed that the VWAP at the final time has a lognormal distribution. The parameters of the approximating lognormal distribution are obtained by matching the first two moments of the volume weighted average price with a lognormal process. A price is then obtained for the fixed strike and digital options when the market price of risk is a constant. We concentrate on the price for calls, prices for puts can be obtained in an analogous manner.

Suggested Citation

  • Antony William Stace, 2007. "A Moment Matching Approach To The Valuation Of A Volume Weighted Average Price Option," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 95-110.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:01:n:s0219024907004068
    DOI: 10.1142/S0219024907004068
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    Citations

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    Cited by:

    1. Alexander Novikov & Nino Kordzakhia, 2013. "On lower and upper bounds for Asian-type options: a unified approach," Papers 1309.2383, arXiv.org.
    2. Alexander Buryak & Ivan Guo, 2014. "Effective and simple VWAP option pricing model," Papers 1407.7315, arXiv.org.
    3. Alexander Novikov & Scott Alexander & Nino Kordzakhia & Timothy Ling, 2016. "Pricing of Asian-type and Basket Options via Upper and Lower Bounds," Papers 1612.08767, arXiv.org.

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