Options on the Minimum or the Maximum of Two Average Prices

37 Pages Posted: 19 Sep 1998

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance

Jin E. Zhang

University of Otago, Otago Business School, Department of Accountancy and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 1999

Abstract

This paper studies options on the minimum/maximum of two average prices. We provide a closed-form pricing formula for the option with geometric averaging starting at any time before maturity. We show overwhelming numerical evidence that the variance reduction technique with the help of the above closed-form solution dramatically improves the accuracy of the simulated price of an option with arithmetic averaging. The proposed options are found widely applicable in risk management and in the design of incentive contracts. The paper also discusses some parity relationships within the family of average-rate options and provides the upper and lower bounds for the proposed options with arithmetic averaging.

JEL Classification: G13

Suggested Citation

Wu, Xueping and Zhang, Jin E., Options on the Minimum or the Maximum of Two Average Prices (August 1999). Available at SSRN: https://ssrn.com/abstract=115794 or http://dx.doi.org/10.2139/ssrn.115794

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Jin E. Zhang (Contact Author)

University of Otago, Otago Business School, Department of Accountancy and Finance ( email )

Dunedin, 9054
New Zealand
64 3 479 8575 (Phone)
64 3 479 8171 (Fax)

HOME PAGE: http://sites.google.com/site/jinzhanghomepage/home

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
533
Abstract Views
2,686
rank
75,517
PlumX Metrics