Pricing of Discretely Sampled Asian Options Under Levy Processes

39 Pages Posted: 21 Jun 2012

See all articles by Sergei Levendorskii

Sergei Levendorskii

Calico Science Consulting

Jiayao Xie

affiliation not provided to SSRN

Date Written: June 20, 2012

Abstract

We develop a new method for pricing options on discretely sampled arithmetic average in exponential L'evy models. The main idea is the reduction to a backward induction procedure for the difference W_n between the Asian option with averaging over n sampling periods and the price of the European option with maturity one period. This allows for an efficient truncation of the state space. At each step of backward induction, W_n is calculated accurately and fast using a piece-wise interpolation or splines, fast convolution and either iFFT or the parabolic inverse Fourier transform. Numerical results demonstrate the advantages of the method.

Keywords: Option pricing, flat iFT method, parabolic iFT method, FFT, refined and enhanced FFT, L\'evy processes, KoBoL, CGMY, BM, Asian options

JEL Classification: G12, C63

Suggested Citation

Levendorskii, Sergei Z. and Xie, Jiayao, Pricing of Discretely Sampled Asian Options Under Levy Processes (June 20, 2012). Available at SSRN: https://ssrn.com/abstract=2088214 or http://dx.doi.org/10.2139/ssrn.2088214

Sergei Z. Levendorskii

Calico Science Consulting ( email )

Austin, TX
United States

Jiayao Xie (Contact Author)

affiliation not provided to SSRN

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