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An efficient and stable method for short maturity Asian options
Author(s) -
Chatterjee Rupak,
Cui Zhenyu,
Fan Jiacheng,
Liu Mingzhe
Publication year - 2018
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21956
Subject(s) - asian option , geometric brownian motion , maturity (psychological) , markov chain , convergence (economics) , mathematics , mathematical optimization , brownian motion , econometrics , mathematical economics , economics , computer science , valuation of options , statistics , psychology , developmental psychology , economy , diffusion process , economic growth , service (business)
In this paper, we develop a Markov chain‐based approximation method to price arithmetic Asian options for short maturities under the case of geometric Brownian motion. It has the advantage of being a closed‐form approximation involving only matrices. It is an accurate, efficient, and stable method for the pricing and hedging of short maturity arithmetic Asian options for which previous methods in the literature have shown either slower convergence or instabilities in hedging parameters. We demonstrate that this method is as good as and sometimes better than existing approximation methods in the literature.