Financial Engineering Seminar
February, 20, 2004 (Fri)
3:00 PM - 3:50 PM(8th period),
Weil Hall 307
OPTIMAL EXERCISE POLICIES AND SIMULATION-BASED
VALUATION FOR AMERICAN-ASIAN OPTIONS
Abstract:
American-Asian options are average-price options that allow early exercise. In this paper, we derive structural properties for the optimal
exercise policy, which are then used to develop an efficient numerical algorithm for pricing such options. In particular, we show that the
optimal policy is a threshold policy: The option should be exercised as soon as the average asset price reaches a characterized threshold,
which can be written as a function of the asset price at that time. By exploiting this and other structural properties, we are able to
parameterize the exercise boundary, and derive gradient estimators for the option payoff with respect to the parameters of the model. These
estimators are then incorporated into a simulation-based algorithm to price American-Asian options. Computational experiments carried out
indicate that the algorithm is very competitive with other recently proposed numerical algorithms.
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