Pricing Asian Options Using Path Bundling
50 Pages Posted: 27 Sep 2001
Date Written: 2000
Abstract
This paper presents a new methodology to price European and American Asian options on a recombining binomial process. The method uses state descriptions for bundles of paths rather than for individual paths, thus reducing the amount of computation needed. Depending on the size of the problem and the availability of computational resources, our methods give either an exact solution or an approximate solution with upper and lower bounds on its error. In comparison to other approaches, our methods are both more nearly accurate and very fast.
Keywords: options pricing, Asian options, numerical methods
JEL Classification: G1
Suggested Citation: Suggested Citation