An exact subexponential-time lattice algorithm for Asian options

Asian options are path-dependent derivatives. How to price them efficiently and accurately has been a longstanding research and practical problem. Asian options can be priced on the lattice. But only exponential-time algorithms are currently known if such options are to be priced on a lattice without approximation. Although efficient approximation methods are available, most of them lack accuracy guarantees. This paper proposes a novel lattice for pricing Asian options. The resulting exact pricing algorithm runs in subexponential time. This is the first exact lattice algorithm to break the exponential-time barrier. Because this lattice converges to the continuous-time stock price process, the proposed algorithm is guaranteed to converge to the desired continuous-time option value.

• Type: Conference
• Year: 2004
• Where: SODA
• Authors: Tian-Shyr Dai, Yuh-Dauh Lyuu
• Keywords: Algorithms, Asian Options, Exact Lattice Algorithm, Lattice Converges, SODA 2004