Open AccessPricing arithmetic asian options under the cev process
Author(s) -
Bin Peng,
Fei Peng
Publication year - 2010
Publication title -
cuadernos de difusión
Language(s) - English
Resource type - Journals
eISSN - 1815-6606
pISSN - 1815-6592
DOI - 10.46631/jefas.2010.v15n29.01
Subject(s) - binomial options pricing model , constant elasticity of variance model , mathematics , asian option , trinomial tree , econometrics , valuation of options , mathematical optimization , computer science , volatility (finance) , volatility smile , sabr volatility model
This paper discusses the pricing of arithmetic Asian options when the underlying stock follows the constant elasticity of variance (CEV) process. We build a binomial tree method to estimate the CEV process and use it to price arithmetic Asian options. We find that the binomial tree method for the lognormal case can effectively solve the computational problems arising from the inherent complexities of arithmetic Asian options when the stock price follows CEV process. We present numerical results to demonstrate the validity and the convergence of the approach for the different parameter values set in CEV process.