Average Interest

39 Pages Posted: 16 Jul 2000 Last revised: 5 Oct 2010

See all articles by George Chacko

George Chacko

Santa Clara University - Finance Department

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Date Written: May 1997

Abstract

We develop analytic pricing models for options on averages by means of a state-space expansion method. These models augment the class of Asian options to markets where the underlying traded variable follows a mean-reverting process. The approach builds from the digital Asian option on the average and enables pricing of standard Asian calls and puts, caps and floors, as well as other exotica. The models may be used (i) to hedge long period interest rate risk cheaply, (ii) to hedge event risk (regime based risk), (iii) to manage long term foreign exchange risk by hedging through the average interest differential, (iv) managing credit risk exposures, and (v) for pricing specialized options like range-Asians. The techniques in the paper provide several advantages over existing numerical approaches.

Suggested Citation

Chacko, George and Das, Sanjiv Ranjan, Average Interest (May 1997). NBER Working Paper No. w6045, Available at SSRN: https://ssrn.com/abstract=226455

George Chacko

Santa Clara University - Finance Department ( email )

Santa Clara, CA 95053
United States

Sanjiv Ranjan Das (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

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