ASIAN OPTION PRICING USING ADAPTIVE PLACEMENT METHOD

• Main Author: TETI ROHAETI (NIM : 20114026), IMAS
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/22554
• Institution: Institut Teknologi Bandung

Asian option is the option that the calculation is dependent on the average price of the asset is recorded on part or the whole life of the option. One way to calculate the average price of these assets is to use arithmetic average. Until now there is no analytic solution for arithmetic average options, therefore an efficient numerical algorithm becomes a promising alternative. One of the most famous numerical algorithms is Hull White Models. In the process, Hull White Models consider average price of the asset as a set of representative average prices with logarithmically equally-spaced placement rule and limited by maximum and minimum average. Next, linear interpolation is used to calculate the price of the option associated with the arithmetic average on a set that does not include the representative average. Adaptive placement method comes with the purpose to reduce the linear interpolation error with replace the logarithmically equally-spaced placement rule in the Hull White’s model by placing more representative average prices in the highly nonlinear area of the option value as the function of the arithmetic average stock price. Numerical experiments verify the superior performance of this method for reducing the interpolation error and hence improving the convergence rate of the benchmark price of the options that have been determined.