Valuation of Asian Options-with Levy Approximation
(2014) NEKN01 20132Department of Economics
- Abstract
- Asian options are difficult to price analytically. Even though they have attracted much attention in recent years, there is still no closed-form solution available for pricing the arithmetic Asian options, because the distribution of the density function is unknown. However, various studies have attempted to solve this problem, Levy (1992) approximates the unknown density function using lognormal distribution by matching the first two moments. This paper investigates how accurate the Levy approach is by comparing values of Asian options from Levy’s approach with Monte Carlo simulations. We find that Levy’s analytic solution tends to over-estimate Asian option values when volatility is constant, but under-estimates under the scenario of... (More)
- Asian options are difficult to price analytically. Even though they have attracted much attention in recent years, there is still no closed-form solution available for pricing the arithmetic Asian options, because the distribution of the density function is unknown. However, various studies have attempted to solve this problem, Levy (1992) approximates the unknown density function using lognormal distribution by matching the first two moments. This paper investigates how accurate the Levy approach is by comparing values of Asian options from Levy’s approach with Monte Carlo simulations. We find that Levy’s analytic solution tends to over-estimate Asian option values when volatility is constant, but under-estimates under the scenario of having stochastic volatility. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/4301159
- author
- Zhang, Qian LU and Mraovic, Aleksandra LU
- supervisor
- organization
- course
- NEKN01 20132
- year
- 2014
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Asian options, Monte Carlo simulation, constant volatility, stochastic volatility
- language
- English
- id
- 4301159
- date added to LUP
- 2014-02-12 09:35:36
- date last changed
- 2014-02-12 09:35:36
@misc{4301159, abstract = {{Asian options are difficult to price analytically. Even though they have attracted much attention in recent years, there is still no closed-form solution available for pricing the arithmetic Asian options, because the distribution of the density function is unknown. However, various studies have attempted to solve this problem, Levy (1992) approximates the unknown density function using lognormal distribution by matching the first two moments. This paper investigates how accurate the Levy approach is by comparing values of Asian options from Levy’s approach with Monte Carlo simulations. We find that Levy’s analytic solution tends to over-estimate Asian option values when volatility is constant, but under-estimates under the scenario of having stochastic volatility.}}, author = {{Zhang, Qian and Mraovic, Aleksandra}}, language = {{eng}}, note = {{Student Paper}}, title = {{Valuation of Asian Options-with Levy Approximation}}, year = {{2014}}, }