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arXiv · 1011.3599

A finite dimensional approximation for pricing moving average options

Marie Bernhart·Peter Tankov·Xavier Warin
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Abstract

We propose a method for pricing American options whose pay-off depends on the moving average of the underlying asset price. The method uses a finite dimensional approximation of the infinite-dimensional dynamics of the moving average process based on a truncated Laguerre series expansion. The resulting problem is a finite-dimensional optimal stopping problem, which we propose to solve with a least squares Monte Carlo approach. We analyze the theoretical convergence rate of our method and present numerical results in the Black-Scholes framework.

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Marie Bernhart, Peter Tankov, Xavier Warin. 2010-11-16. A finite dimensional approximation for pricing moving average options. https://arxiv.org/abs/1011.3599

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