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Asian and Australian options: a common perspective

Ewald, Christian-Oliver, Menkens, Olaf and Hung Marten Ting, Sai (2013) Asian and Australian options: a common perspective. Journal of Economic Dynamics and Control, 37 (5). pp. 1001-1018. ISSN 0165-1889

Abstract
We show that Australian options are equivalent to fixed or floating strike Asian options and consequently that by studying Asian options from the Australian perspective and vice versa, much can be gained. One specific application of this “Australian approach” leads to a natural dimension reduction for the pricing PDE of Asian options, with or without stochastic volatility, featuring time independent coefficients. Another application lies in the improvement of Monte Carlo schemes, where the “Australian approach” results in a path-independent method. We also show how the Milevsky and Posner (1998) result on the reciprocal Γ-approximation for Asian options can be quickly obtained by using the connection to Australian options. Further, we present an analytical (exact) pricing formula for Australian options and adapt a result of Carr et al. (2008) to show that the price of an Australian call option is increasing in the volatility and by doing this answering a standing question by Moreno and Navas (2008).
Metadata
Item Type:Article (Published)
Refereed:Yes
Uncontrolled Keywords:Financial Mathematics; Asset pricing; Derivatives; Asian options
Subjects:Mathematics > Applied Mathematics
DCU Faculties and Centres:DCU Faculties and Schools > Faculty of Science and Health > School of Mathematical Sciences
Publisher:Elsevier
Official URL:http://dx.doi.org/10.1016/j.jedc.2013.01.006
Copyright Information:© 2013 Elsevier
Use License:This item is licensed under a Creative Commons Attribution-NonCommercial-Share Alike 3.0 License. View License
ID Code:18088
Deposited On:25 Apr 2013 10:23 by Olaf Menkens . Last Modified 19 Jul 2018 14:59
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