Asian and Australian options: a common perspective

Ewald, C.-O. , Menkens, O. and Ting, S.H.M. (2013) Asian and Australian options: a common perspective. Journal of Economic Dynamics and Control, 37(5), pp. 1001-1018. (doi: 10.1016/j.jedc.2013.01.006)

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 volatili

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Ewald, Professor Christian
• Authors: Ewald, C.-O., Menkens, O., and Ting, S.H.M.
• Subjects: H Social Sciences > HB Economic Theory; H Social Sciences > HG Finance; Q Science > QA Mathematics
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Journal of Economic Dynamics and Control
• ISSN: 0165-1889
• Published Online: 25 January 2013