Analytics and algorithms for geometric average trigger reset options
Resource
IEEE International Conference on Computational Intelligence for Financial Engineering, (CIFER), 2003
Computational Intelligence for Financial Engineering, 2003. Proceedings. 2003 IEEE International Conference on
Journal
IEEE/IAFE Conference on Computational Intelligence for Financial Engineering
Journal Volume
2003-January
Pages
55-62
Date Issued
2003
Author(s)
Abstract
The geometric average trigger reset option resets the strike price based on the geometric average of the underlying asset's prices over a monitoring window. This paper derives an analytic formula and two numerical methods for pricing this option with multiple resets. The analytic formula in fact is a corollary of a general formula that holds for a large class of path-dependent options: It prices any option whose payoff function can be written as eb-X1{XεA}. For general American-style reset options, an O(n4h2-time algorithm on n-period binomial lattice is presented. A much more efficient O(n3hm)-time algorithm prices European-style reset options. Monte Carlo simulation suggests that the European-style geometric average trigger reset option and the arithmetic version have similar option values. This implies that results in this paper give tight prices for the difficult arithmetic version.
SDGs
Type
conference paper
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