Pricing Bounds on Asian Options
22 Pages Posted: 17 May 2006
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
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