Short Maturity Asian Options in Local Volatility Models

DOI10.1137/15M1047568MaRDI QIDQ2953946zbMATH OpenOpenAlexFDO

Authors Dan Pirjol, Lingjiong Zhu

Publication date 11 January 2017

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

Full work available at URL https://arxiv.org/abs/1609.07559

zbMATH Keywords

Asian optionslarge deviationslocal volatilityshort maturityvariational problem

Mathematics Subject Classification ID

Large deviations (60F10) Numerical methods for variational inequalities and related problems (65K15) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: We present a rigorous study of the short maturity asymptotics for Asian options with continuous-time averaging, under the assumption that the underlying asset follows a local volatility model. The asymptotics for out-of-the-money, in-the-money, and at-the-money cases are derived, considering both fixed strike and floating strike Asian options. The asymptotics for the out-of-the-money case involves a non-trivial variational problem which is solved completely. We present an analytical approximation for Asian options prices, and demonstrate good numerical agreement of the asymptotic results with the results of Monte Carlo simulations and benchmark test cases in the Black-Scholes model for option parameters relevant in practical applications.

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Cited in

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