An exact subexponential-time lattice algorithm for Asian options
Resource
Acta Informatica 44 (1): 23-39
Journal
Acta Informatica
Journal Volume
44
Journal Issue
1
Pages
23-39
Date Issued
2007
Author(s)
Dai, Tian-Shyr
Abstract
Asian options are popular financial derivative securities. Unfortunately, no exact pricing formulas exist for their price under continuous-time models. Asian options can also be priced on the lattice, which is a discretized version of the continuous- time model. But only exponential-time algorithms exist if the options are priced on the lattice without approximations. Although efficient approximation methods are available, they lack accuracy guarantees in general. This paper proposes a novel lattice structure for pricing Asian options. The resulting pricing algorithm is exact (i.e., without approximations), converges to the value under the continuous-time model, and runs in subexponential time. This is the first exact, convergent lattice algorithm to break the long-standing exponential-time barrier. © Springer-Verlag 2007.
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Type
journal article
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