SFB 303 Discussion Paper No. B-323

Author: Nielsen, J. A., and K. Sandmann
Title: The Pricing of Asian Options under Stochastic Interest Rates
Abstract: The purpose of this paper is to analyse the effect of stochastic interest rates on the pricing of Asian options. It is shown that a stochastic, in contrast to a deterministic, development of the term structure of interest rates has a significant influence. The price of the underlying asset, e.g. a stock or oil, and the prices of bonds are assumed to follow correlated two dimensional Ito processes. The averages considered in the Asian options are calculated on a discrete time grid, e.g. all closing prices on Wednesdays during the lifetime of the contract. The value of an Asian option will be obtained through the application of Monte Carlo simulation, and for this purpose the stochastic processes for the basic assets need not to be severely restricted. However to make comparison with published results originating from models with deterministic interest rates we will stay within the setting of a Gaussian framework.
Keywords: Asian Options, Forward Risk Adjusted Measure, Monte Carlo Simulation
JEL-Classification-Number: G13
Creation-Date: May 1995, This version December 1995
URL: ../1995/b/bonnsfb323.pdf

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