Efficient, Exact Algorithms for Asian Options with Multiresolution Lattices

Authors: Dai T-S.¹; Lyuu Y-D.²

Source: Review of Derivatives Research, Volume 5, Number 2, 2002 , pp. 181-203(23)

Publisher: Springer

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Abstract:

Asian options are a kind of path-dependent derivative. How to price such derivatives efficiently and accurately has been a long-standing research and practical problem. This paper proposes a novel multiresolution (MR) trinomial lattice for pricing European- and American-style arithmetic Asian options. Extensive experimental work suggests that this new approach is both efficient and more accurate than existing methods. It also computes the numerical delta accurately. The MR algorithm is exact as no errors are introduced during backward induction. In fact, it may be the first exact discrete-time algorithm to break the exponential-time barrier. The MR algorithm is guaranteed to converge to the continuous-time value.

Keywords: Asian options; path-dependent options; trinomial model; multiresolution

Language: English

Document Type: Research article

Affiliations: 1: Dept. of Computer Science & Information Engineering, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei, Taiwan E-mail: dai@csie.ntu.edu.tw 2: Dept. of Computer Science & Information Engineering, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei, Taiwan and Department of Finance, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei, Taiwan E-mail: lyuu@csie.ntu.edu.tw

Publication date: 2002-01-01