A finite dimensional approximation for pricing moving average options
Pricing of Securities
2010-11-17 v1
Abstract
We propose a method for pricing American options whose pay-off depends on the moving average of the underlying asset price. The method uses a finite dimensional approximation of the infinite-dimensional dynamics of the moving average process based on a truncated Laguerre series expansion. The resulting problem is a finite-dimensional optimal stopping problem, which we propose to solve with a least squares Monte Carlo approach. We analyze the theoretical convergence rate of our method and present numerical results in the Black-Scholes framework.
Keywords
Cite
@article{arxiv.1011.3599,
title = {A finite dimensional approximation for pricing moving average options},
author = {Marie Bernhart and Peter Tankov and Xavier Warin},
journal= {arXiv preprint arXiv:1011.3599},
year = {2010}
}