Implied Volatility from Asian Options Via Monte Carlo Methods

Abstract

We discuss how implied volatilities for OTC traded Asian options can be computed by combining Monte Carlo techniques with the Newton method in order to solve nonlinear equations. The method relies on accurate and fast computation of the corresponding vegas of the option. In order to achieve this we propose the use of logarithmic derivatives instead of the classical approach. Our simulations document that the proposed method shows far better results than the classical approach. We also discuss the issue of variance reduction in order to optimize our method.

Keywords: implied volatility, Monte Carlo simulation, Asian options, exotic options

JEL Classification: C00, C15, C19, C51, C61