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Pricing Bounds on Asian Options

Published online by Cambridge University Press:  06 April 2009

J. Aase Nielsen and
Klaus Sandmann
J. Aase Nielsen
Affiliation:
atsjan@imf.au.dk, Department of Operations Research, University of Aarhus, Bldg. 530, Ny Munkegade, DK-8000 Aarhus C, Denmark;
Klaus Sandmann
Affiliation:
k.sandmann@wiwi.uni-bonn.de, Department of Finance and Banking, University of Bonn, Adenauer Allee 24–42, D-53113 Bonn, Germany.
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Abstract

This paper aims to develop and compare bounds on the pricing formulas for European type discrete Asian options. The lower bound is found by conditioning the maturity payment of the Asian option by the geometric average and the bound derived can be expressed as a portfolio of delayed payment European call options. Several exercise price-dependent upper bounds are derived. Like the lower bound, one of the upper bounds is expressed as a portfolio of delayed payment European call options. Through a numerical analysis, we conclude that more information is gained from the readily calculated bounds than from the usually applied pricing approximations. From the closed-form solutions of the bounds, hedging positions are finally derived.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 2 , June 2003, pp. 449 - 473
Copyright
Copyright © School of Business Administration, University of Washington 2003

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