A finite dimensional approximation for pricing moving average options

Details A finite dimensional approximation for pricing moving average options A finite dimensional approximation for pricing moving average options

2010-11-16

arxiv.org/abs/1011.3599v1

Economy

Quantitative Finance

Pricing of Securities

Scientific paper

We propose a method for pricing American options whose pay-off depends on the moving average of the underlying asset price. The method uses a finite dimensional approximation of the infinite-dimensional dynamics of the moving average process based on a truncated Laguerre series expansion. The resulting problem is a finite-dimensional optimal stopping problem, which we propose to solve with a least squares Monte Carlo approach. We analyze the theoretical convergence rate of our method and present numerical results in the Black-Scholes framework.

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