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An accurate binomial model for pricing American Asian option |
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| Authors: | Jian Liu Weixing Wu Jingfeng Xu Haijian Zhao |
| Institution: | 1. School of Insurance, Central University of Finance and Economics, Beijing, 100081, China 2. Research Center for Applied Finance, School of Banking and Finance, University of International Business and Economics, Beijing, 100029, China 3. China Institute for Actuarial Science, Central University of Finance and Economics, Beijing, 100081, China 4. Bosera Asset Management Co., Ltd., Shenzhen, 518000, China |
| Abstract: | This paper presents simple and fast algorithms for computing very tight upper and lower bounds on the prices of American Asian options in the binomial model. The authors choose two types sets of the actual arithmetic average prices, instead of the simulated values in other existing models, as the representative average prices at each node of the binomial tree. This approach simplifies effectively the computation and reduces the error caused by the linear interpolation. Numerical results show that the approach produces accurate upper and lower bounds compared to the other existing methods based on the binomial tree. |
| Keywords: | Asian option binomial tree option pricing |
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