Pricing Bounds on Asian Options

22 Pages Posted: 17 May 2006

See all articles by J. Aase Nielsen

J. Aase Nielsen

Aarhus University - Department of Theoretical Statistics and Operations Research

Klaus Sandmann

University of Bonn - The Bonn Graduate School of Economics

Abstract

The aim of the paper is to develop and compare bounds on the pricing formulas for European type discrete Asian options. The lower bound is found by conditioning the maturity payment of the Asian option by the geometric average and the bound derived can be expressed as a portfolio of delayed payment European call options. Furthermore, several exercise price dependent upper bounds are derived. Like the lower bound, one of the upper bounds is expressed as a portfolio of delayed payment European call options. Through a numerical analysis it is concluded that more information is gained from the readily calculated bounds than from the usually applied pricing approximations. From the closed-form solutions of the bounds, hedging positions are finally derived.

Keywords: Asian Option, arbitrage pricing, hedging, Monte Carlo simulation,

JEL Classification: G13

Suggested Citation

Nielsen, Jørgen Aase and Sandmann, Klaus, Pricing Bounds on Asian Options. Journal of Financial and Quantitative Analysis (JFQA), Vol. 38, No. 2, June 2003. Available at SSRN: https://ssrn.com/abstract=901950

Jørgen Aase Nielsen

Aarhus University - Department of Theoretical Statistics and Operations Research ( email )

DK-8000 Aarhus C
Denmark

Klaus Sandmann (Contact Author)

University of Bonn - The Bonn Graduate School of Economics ( email )

Adenauerallee 24-26
Bonn, D-53113
Germany

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