RT Journal Article
SR Electronic
T1 Static Hedging of Asian Options under Lévy Models
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 63
OP 72
DO 10.3905/jod.2005.479381
VO 12
IS 3
A1 Hansjörg Albrecher
A1 Jan Dhaene
A1 Marc Goovaerts
A1 Wim Schoutens
YR 2005
UL https://pm-research.com/content/12/3/63.abstract
AB The Asian option pricing problem is a lot like the American put problem in the 1970s. An Asian payoff is a rather simple, and common, option feature, but it messes up our clean, closed-form valuation equations. This situation is apparently a persistent source of annoyance to mathematicians and other quants, who respond with an outpouring of creativity, in the form of theory, algorithms, and approximate solutions. Although this may seem like overkill for the specific problem at hand, it produces useful new ideas and techniques for our general derivatives valuation toolkit. In this article, Albrecher et al, introduce a new approach to pricing Asian options, based on the principle of comonotonicity and the “stop-loss transform.” They derive tight bounds on the value, even when the underlying asset's price follows a Lévy process, rather than a Gaussian diffusion. As with many of the solutions to the American put problem, this technique can potentially be applied to a much broader class of valuation problems.