Reducing dimension in pricing asian option

ksdt · November 14th, 2002, 5:36 am

HiI am working on some project related to pricing asian option under volatility skew. I read some article on Arithmetic Asian option pricing and understood how they reduced dimension to get 1 dim PDE when they assme Levy process or Independent Increment process(Including GBM or Merton Jump model). I am wonderingif there are some ways to do these techniques under the assumption that volatiliy is local (or stochastic)Thanks.

mj · November 14th, 2002, 9:45 am

You should read the paper by Benhamou and Duguet, It's downloadable from WOPEC.Their technique is also valid in the prescence of a displacement, I discuss this in my paper on replicating exotics which can be downloaded from www.rebonato.comMJ

ksdt · November 14th, 2002, 9:54 pm

MJ,Thanks a lot!I will read both papers.ksdt