Asian option as a fixed-point

DOI10.1007/S11784-018-0570-1zbMATH Open1403.91349arXiv1510.08161OpenAlexW2963456671WikidataQ129764550 ScholiaQ129764550MaRDI QIDQ721236FDOQ721236

Authors: Adriana Ocejo 

Publication date: 18 July 2018

Published in: Journal of Fixed Point Theory and Applications (Search for Journal in Brave)

Abstract: We characterize the price of an Asian option, a financial contract, as a fixed-point of a non-linear operator. In recent years, there has been interest in incorporating changes of regime into the parameters describing the evolution of the underlying asset price, namely the interest rate and the volatility, to model sudden exogenous events in the economy. Asian options are particularly interesting because the payoff depends on the integrated asset price. We study the case of both floating- and fixed-strike Asian call options with arithmetic averaging when the asset follows a regime-switching geometric Brownian motion with coefficients that depend on a Markov chain. The typical approach to finding the value of a financial option is to solve an associated system of coupled partial differential equations. Alternatively, we propose an iterative procedure that converges to the value of this contract with geometric rate using a classical fixed-point theorem.

Full work available at URL: https://arxiv.org/abs/1510.08161

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zbMATH Keywords

regime-switchingfixed-pointAsian optionMarkov-modulatedfixed-strikefloating-strikeintegrated geometric Brownian motion

Mathematics Subject Classification ID

Applications of Markov chains and discrete-time Markov processes on general state spaces (social mobility, learning theory, industrial processes, etc.) (60J20) Derivative securities (option pricing, hedging, etc.) (91G20) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Fixed-point theorems (47H10)

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Cited In (8)

• Title not available (Why is that?)
• Asian options with jumps
• Pricing Asian options of discretely monitored geometric average in the regime-switching model
• On constrained minimization, variational inequality and split feasibility problem via new iteration scheme in Banach spaces
• Double knock-out Asian barrier options which widen or contract as they approach maturity
• THE GREEKS OF INDONESIAN CALL OPTION
• The valuation at origination of mortgages with full prepayment and default risks
• Optimal refinancing strategy for mortgage rate with regime switching

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