Asian basket with floating strike (newbie qn)

HBHB · September 11th, 2008, 1:22 pm

Hi, just wondering what is an efficient approximation for valuing the following?max( S(Tm) - S(Ave of settles from T0 to Tn) - K, 0) where T0 = 0, Tm > Tn > T0would moment matching be suitable given that the expiry date of the option is after the averaging period? i.e. I approximate find the first 3 moments of the S(T) - S(ave); and then I match it to a lognormal distribution to backsolve the mean, std dev and skew; and then use black-scholes...help much appreciated! thks!

Sonyah · September 11th, 2008, 4:23 pm

You can use fixed strike asian model as long as you are not inside the averaging period yet - there is a paper by henderson et al which tells you the formula - i will look out the ref for you - i have it somewhere

manolom · September 12th, 2008, 6:17 am

QuoteOriginally posted by: Sonyahthere is a paper by henderson et al which tells you the formula - i will look out the ref for you - i have it somewhereMaybe On the Equivalence of Floating and Fixed-Strike Asian Options ?

Sonyah · September 12th, 2008, 7:20 am

Yes exactly that's the one thanks!

HBHB · September 22nd, 2008, 1:32 pm

thanks Sonyah and Manolom!I was wondering if I can still use the Vecer's mtd as the type of payoff eg max( S(Tm) - S(Ave of settles from T0 to Tn) - K, 0) where T0 = 0, Tm > Tn > T0, where S(Tm) is known only much later after the averaging period has finished.This payoff differs from the usual asian fixed strike eg max(S(Ave of settles from T0 to Tn) - K, 0) or the asian with a floating strike max (S(Ave of settles from T0 to Tn) - S(Tn), 0). And also I am trying to price it when it is in the averaging period as well.any advice?