Asian Options Versus Vanilla Options

25 Pages Posted: 10 Jan 2007

See all articles by George L. Ye

George L. Ye

Beijing Institute of Technology at Zhuhai

Date Written: January 5, 2007

Abstract

While it is commonly believed that an Asian option is always cheaper than its plain vanilla European counterpart, this paper shows that this notion is false. By deriving the lower bounds on Asian option prices as volatility goes to zero and comparing them to the lower bounds of vanilla European option prices, it can be proved that this notion may be violated for call options when the dividend yield of the underlying stock is higher than the interest rate, as well as for put options when the dividend yield of the underlying stock is lower than the interest rate.

Keywords: Asian option, exotic option

JEL Classification: G13

Suggested Citation

Ye, George Longsen, Asian Options Versus Vanilla Options (January 5, 2007). Available at SSRN: https://ssrn.com/abstract=955698 or http://dx.doi.org/10.2139/ssrn.955698

George Longsen Ye (Contact Author)

Beijing Institute of Technology at Zhuhai ( email )

6 Jinfeng Rd
Zhuhai, Guangdong 519088
China
+8618666930866 (Phone)

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