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SHORT MATURITY ASIAN OPTIONS FOR THE CEV MODEL

Published online by Cambridge University Press:  05 June 2018

Dan Pirjol  and
Lingjiong Zhu
Dan Pirjol
Affiliation:
J. P. Morgan 277 Park Avenue, New York, NY-10172, USA E-mail: [email protected]
Lingjiong Zhu
Affiliation:
Department of MathematicsFlorida State University1017 Academic Way, Tallahassee, FL-32306, USA E-mail: [email protected]
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Abstract

We present a rigorous study of the short maturity asymptotics for Asian options with continuous-time averaging, under the assumption that the underlying asset follows the constant elasticity of variance (CEV) model. The leading order short maturity limit of the Asian option prices under the CEV model is obtained in closed form. We propose an analytical approximation for the Asian options prices which reproduces the exact short maturity asymptotics, and demonstrate good numerical agreement of the asymptotic results with Monte Carlo simulations and benchmark test cases for option parameters relevant for practical applications.

Keywords

Asian optionsCEV modellarge deviationsshort maturityvariational problem
Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 33 , Issue 2 , April 2019 , pp. 258 - 290
Copyright
Copyright © Cambridge University Press 2018 

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