Pricing of Asian-type and Basket Options via Upper and Lower Bounds

TL;DR

This paper introduces a unified framework for pricing average-type options, including Asian and basket options, using upper and lower bounds to simplify calculations and provide accurate approximations.

Contribution

It develops a general approach for pricing average-type options with bounds that reduce problem dimensionality and improve approximation accuracy.

Findings

Lower bounds reduce problem dimensionality.

Bounds provide reasonable price approximations.

Applicable to Asian, basket, and VWAP options.

Abstract

This paper sets out to provide a general framework for the pricing of average-type options via lower and upper bounds. This class of options includes Asian, basket and options on the volume-weighted average price. We demonstrate that in cases under discussion lower bounds allow for the dimensionality of the problem to be reduced and that these methods provide reasonable approximations to the price of the option. Keywords: Asian options, Basket options, Lower and Upper bounds, Volume-weighted average prices (VWAP), Levy processes.