A finite-dimensional approximation for pricing moving average options

DOI10.1137/100815566MaRDI QIDQ5388693zbMATH OpenOpenAlexFDO

Authors Marie Bernhart, Peter Tankov, Xavier Warin

Publication date 19 April 2012

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1011.3599

zbMATH Keywords

American optionsfinite-dimensional approximationLaguerre polynomialmoving averageleast squares Monte Carloindexed swing options

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Orthogonal polynomials and functions of hypergeometric type (Jacobi, Laguerre, Hermite, Askey scheme, etc.) (33C45)

Abstract: We propose a method for pricing American options whose pay-off depends on the moving average of the underlying asset price. The method uses a finite dimensional approximation of the infinite-dimensional dynamics of the moving average process based on a truncated Laguerre series expansion. The resulting problem is a finite-dimensional optimal stopping problem, which we propose to solve with a least squares Monte Carlo approach. We analyze the theoretical convergence rate of our method and present numerical results in the Black-Scholes framework.

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(8)

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• Moving average options: machine learning and Gauss-Hermite quadrature for a double non-Markovian problem
• A research on moving average Asian option pricing
• Finite-dimensional representations for controlled diffusions with delay
• A moving boundary approach to American option pricing

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