Asian Option Pricing with Orthogonal Polynomials
29 Pages Posted: 6 Feb 2018 Last revised: 18 Sep 2018
Date Written: January 29, 2018
In this paper we derive a series expansion for the price of a continuously sampled arithmetic Asian option in the Black-Scholes setting. The expansion is based on polynomials that are orthogonal with respect to the log-normal distribution. All terms in the series are fully explicit and no numerical integration nor any special functions are involved. We provide sufficient conditions to guarantee convergence of the series. The moment indeterminacy of the log-normal distribution introduces an asymptotic bias in the series, however we show numerically that the bias can safely be ignored in practice.
Keywords: Asian Option, Option Pricing, Orthogonal Polynomials
JEL Classification: C32, G13
Suggested Citation: Suggested Citation