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Conditional Asian Options

Author

Listed:
  • RUNHUAN FENG

    (Department of Mathematics, University of Illinois at Urbana-Champaign, Urbana, Illinois, United States of America)

  • HANS W. VOLKMER

    (Department of Mathematical Sciences, University of Wisconsin — Milwaukee, Milwaukee, Wisconsin, United States of America)

Abstract

Conditional Asian options are recent market innovations, which offer cheaper and long-dated alternatives to regular Asian options. In contrast with payoffs from regular Asian options which are based on average asset prices, the payoffs from conditional Asian options are determined only by average prices above certain threshold. Due to the limited inclusion of prices, conditional Asian options further reduce the volatility in the payoffs than their regular counterparts and have been promoted in the market as viable hedging and risk management instruments for equity-linked life insurance products. There has been no previous academic literature on this subject and practitioners have only been known to price these products by simulations. We propose the first analytical approach to computing prices and deltas of conditional Asian options in comparison with regular Asian options. In the numerical examples, we put to the test some cost-benefit claims by practitioners. As a by-product, the work also presents some distributional properties of the occupation time and the time-integral of geometric Brownian motion during the occupation time.

Suggested Citation

  • Runhuan Feng & Hans W. Volkmer, 2015. "Conditional Asian Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(06), pages 1-24.
    • Handle: RePEc:wsi:ijtafx:v:18:y:2015:i:06:n:s0219024915500405
    DOI: 10.1142/S0219024915500405
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    References listed on IDEAS

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    1. Feng, Runhuan & Volkmer, Hans W., 2014. "Spectral Methods For The Calculation Of Risk Measures For Variable Annuity Guaranteed Benefits," ASTIN Bulletin, Cambridge University Press, vol. 44(3), pages 653-681, September.
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    Cited by:

    1. Wensheng Yang & Jingtang Ma & Zhenyu Cui, 2021. "Analysis of Markov chain approximation for Asian options and occupation-time derivatives: Greeks and convergence rates," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 93(2), pages 359-412, April.

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