Bounds for Asian basket options

  • Authors:

  • Griselda Deelstra;Ibrahima Diallo;Michèle Vanmaele

  • Affiliations:

  • Department of Mathematics, ECARES, Université Libre de Bruxelles, CP 210, 1050 Brussels, Belgium;Department of Mathematics, Université Libre de Bruxelles, CP 210, 1050 Brussels, Belgium;Department of Applied Mathematics and Computer Science, Ghent University, Krijgslaan 281, Building S9, 9000 Gent, Belgium

  • Venue:
  • Journal of Computational and Applied Mathematics
  • Year:
  • 2008

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Abstract

In this paper we propose pricing bounds for European-style discrete arithmetic Asian basket options in a Black and Scholes framework. We start from methods used for basket options and Asian options. First, we use the general approach for deriving upper and lower bounds for stop-loss premia of sums of non-independent random variables as in Kaas et al. [Upper and lower bounds for sums of random variables, Insurance Math. Econom. 27 (2000) 151-168] or Dhaene et al. [The concept of comonotonicity in actuarial science and finance: theory, Insurance Math. Econom. 31(1) (2002) 3-33]. We generalize the methods in Deelstra et al. [Pricing of arithmetic basket options by conditioning, Insurance Math. Econom. 34 (2004) 55-57] and Vanmaele et al. [Bounds for the price of discrete sampled arithmetic Asian options, J. Comput. Appl. Math. 185(1) (2006) 51-90]. Afterwards we show how to derive an analytical closed-form expression for a lower bound in the non-comonotonic case. Finally, we derive upper bounds for Asian basket options by applying techniques as in Thompson [Fast narrow bounds on the value of Asian options, Working Paper, University of Cambridge, 1999] and Lord [Partially exact and bounded approximations for arithmetic Asian options, J. Comput. Finance 10 (2) (2006) 1-52]. Numerical results are included and on the basis of our numerical tests, we explain which method we recommend depending on moneyness and time-to-maturity.