An Adjusted Trinomial Lattice for Pricing Arithmetic Average Based Asian Option
American Journal of Applied Mathematics
Volume 6, Issue 2, April 2018, Pages: 28-33
Received: Nov. 9, 2017; Accepted: Nov. 22, 2017; Published: Mar. 24, 2018
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Authors
Dennis Odhiambo Ogot, Mathematics, Pan African University Institute for Basic Sciences, Technology and Innovation, Nairobi, Kenya
Phillip Ngare, Mathematics, Pan African University Institute for Basic Sciences, Technology and Innovation, Nairobi, Kenya
Joseph Mung’atu, Mathematics, Pan African University Institute for Basic Sciences, Technology and Innovation, Nairobi, Kenya
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Abstract
An adjusted trinomial model for pricing both European and American arithmetic average-based Asian options is proposed. The Kamrad and Ritchken trinomial tree governs the underlying asset evolution. The algorithm selects a subset of the true averages realized at each node to serve as the representative averages. The option prices are then computed via backward induction and interpolation. The results show that the trinomial method produces more accurate prices especially in the case of European style Asian options.
Keywords
Asian Options, Arithmetic Average, Lattice, Trinomial
To cite this article
Dennis Odhiambo Ogot, Phillip Ngare, Joseph Mung’atu, An Adjusted Trinomial Lattice for Pricing Arithmetic Average Based Asian Option, American Journal of Applied Mathematics. Vol. 6, No. 2, 2018, pp. 28-33. doi: 10.11648/j.ajam.20180602.11
Copyright
Copyright © 2018 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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