Early Exercise Boundary for American Type of Floating Strike Asian Option and Its Numerical Approximation

25 Pages Posted: 31 Dec 2009

See all articles by Tomas Bokes

Tomas Bokes

Comenius University - Department of Economic and Financial Models

Daniel Sevcovic

Comenius University - Faculty of Mathematics, Physics and Informatics

Date Written: December 7, 2009

Abstract

In this paper we generalize and analyze the model for pricing American-style Asian options due to Hansen and Jorgensen by including a continuous dividend rate q and a general method of averaging of the floating strike. We focus on the qualitative and quantitative analysis of the early exercise boundary. The first order Taylor series expansion of the early exercise boundary close to expiry is constructed. We furthermore propose an efficient numerical algorithm for determining the early exercise boundary position based on the front fixing method. Construction of the algorithm is based on a solution to a nonlocal parabolic partial differential equation for the transformed variable representing the synthesized portfolio. Various numerical results and comparisons of our numerical method and the method developed by Dai and Kwok are presented.

Keywords: option pricing, American-style of Asian options, early exercise boundary, limiting behavior close to expiry

Suggested Citation

Bokes, Tomas and Sevcovic, Daniel, Early Exercise Boundary for American Type of Floating Strike Asian Option and Its Numerical Approximation (December 7, 2009). Available at SSRN: https://ssrn.com/abstract=1529586 or http://dx.doi.org/10.2139/ssrn.1529586

Tomas Bokes

Comenius University - Department of Economic and Financial Models ( email )

SK-842 48 Bratislava
Slovakia

Daniel Sevcovic (Contact Author)

Comenius University - Faculty of Mathematics, Physics and Informatics ( email )

Mlynská dolina
SK-842 48 Bratislava, 842 48
Slovakia

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