Implied Volatility from Asian Options Via Monte Carlo Methods

33 Pages Posted: 19 Jan 2007 Last revised: 3 Jan 2008

See all articles by Christian-Oliver Ewald

Christian-Oliver Ewald

University of Glasgow; Høgskole i Innlandet

Zhaojun Yang

Southern University of Science and Technology - Department of Finance

Yajun Xiao

University of Freiburg - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2006

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

Suggested Citation

Ewald, Christian-Oliver and Yang, Zhaojun and Xiao, Yajun, Implied Volatility from Asian Options Via Monte Carlo Methods (July 2006). Available at SSRN: https://ssrn.com/abstract=958037 or http://dx.doi.org/10.2139/ssrn.958037

Christian-Oliver Ewald (Contact Author)

University of Glasgow ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

Høgskole i Innlandet ( email )

Lillehammer, 2624
Norway

Zhaojun Yang

Southern University of Science and Technology - Department of Finance ( email )

No 1088, Xueyuan Rd.
District of Nanshan
Shenzhen, Guangdong 518055
China

HOME PAGE: http://faculty.sustc.edu.cn/profiles/yangzj

Yajun Xiao

University of Freiburg - Department of Economics ( email )

Freiburg, D-79085
Germany

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