23 Pages Posted: 13 Nov 2015
Date Written: October 10, 2013
We derive a closed-form formula for the fair value of call and put options written on the arithmetic average of security prices driven by jump diffusion processes displaying (possibly periodical) trend, time varying volatility, and mean reversion. The model allows one for jointly fitting quoted futures curve and the time structure of spot price volatility. Our result extends the no-jump case put forward in [Fusai, G., Marena, M., Roncoroni, A. 2008. Analytical Pricing of Discretely Monitored Asian-Style Options: Theory and Application to Commodity Markets. Journal of Banking and Finance 32 (10), 2033-2045]. A few tests based on commodity price data assess the importance of introducing a jump component on the resulting option prices.
Keywords: Asian-style options, Price models with jumps, Transform methods, Com- modity markets, Energy markets
JEL Classification: C63, G13
Suggested Citation: Suggested Citation