Download This PaperImplied Volatility from Asian Options Via Monte Carlo Methods
33 Pages Posted: 19 Jan 2007 Last revised: 3 Jan 2008
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Implied Volatility from Asian Options Via Monte Carlo Methods
Implied Volatility from Asian Options Via Monte Carlo Methods
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: Suggested Citation
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