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Small dimension PDE for discrete Asian options

✍ Scribed by Eric Benhamou; Alexandre Duguet

Book ID
104293348
Publisher
Elsevier Science
Year
2003
Tongue
English
Weight
297 KB
Volume
27
Category
Article
ISSN
0165-1889

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✦ Synopsis

This paper presents an e cient method for pricing discrete Asian options in presence of smile and non-proportional dividends. Using an homogeneity property, we show how to reduce an n0 dimensional problem to a one-or two-dimensional one. We examine di erent numerical speciΓΏcations of our dimension reduced PDE using a Crank-Nicholson method (interpolation method, grid boundaries, time and space steps) as well as the extension to the case of non-proportional discrete dividends, using a jump condition. We benchmark our results with Quasi Monte-Carlo simulation and a multi-dimensional PDE

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