Pricing Asian options under a Hyper-Exponential jump diffusion model

Operations Research (Impact Factor: 1.5). 07/2011; 60(1). DOI: 10.2307/41476338

ABSTRACT We obtain a closed-form solution for the double-Laplace transform of Asian options under the hyper-exponential jump diffusion model (HEM). Similar results are only available previously in the special case of the Black-Scholes model (BSM). Even in the case of the BSM, our approach is simpler as we essentially use only Itô's formula and do not need more advanced results such as those of Bessel processes and Lamperti's representation. As a by-product we also show that a well-known recursion relating to Asian options has a unique solution in a probabilistic sense. The double-Laplace transform can be inverted numerically via a two-sided Euler inversion algorithm. Numerical results indicate that our pricing method is fast, stable, and accurate, and performs well even in the case of low volatilities. Subject classifications: Finance: asset pricing. Probability: stochastic model applica-tions. Area of review: Financial engineering.

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