The Vyncke et al. solution for pricing European-style arithmetic Asian options

This paper investigates the European-style arithmetic Asian option pricing solution of Vyncke, Dhaene, and Goovaerts (2004) who apply the concept of comonotonicity to obtain upper and lower bounds for the true option price. A moment-matching formula is used to and a weighted average solution of the two bounds, thereby obtaining a fast approximation to the true price. This method is implemented and tested against an accurate Monte Carlo benchmark and compared with some other well-known closed-form approximations. Although a summary of some of the theoretical aspects underpinning the solution is provided to build intuitive understanding, the focus of the paper lies instead in the empirical analysis. The Vyncke et al. solution is found to be very accurate across a range of input parameters and out-performs competing solutions in some important cases, most notably high volatility and long maturities.

Grantor dc:publisher.institution

Division of Actuarial Science

Year dc:date.issued

2010

Author dc:creator

• Floor, Justin David

Advisor dc:contributor.advisor

• West, Graeme

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/12379

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/12379