Abstract
Asian options are the popular second generation derivative products and embedded in many structured notes to enhance upside performance. The embedded options, as a result, usually have a long duration. The movement of interest rates becomes more important in pricing such long-dated options. In this paper, the pricing of Asian options under stochastic interest rates is studied. Assuming Hull and White model for the interest rates, a closed-form formula for geometric-average options is derived. As a by-product, pricing formula is also given for plan-vanilla options under stochastic interest rates.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Schwartz E S, Brennan M J. Convertible bonds: valuations and optimal strategies for call and conversion, Journal of Finance, 1977, 32(5):1699–1715.
Brennan M J, Schwartz E S. Analyzing convertible bonds, Journal of Financial and Quantitative Analysis, 1980, 15(4):907–929.
Davis M, Lischka F R. Convertible bonds with market risk and credit risk, Working papers, Tokyo-Mitsubishi International plc, 1999.
Ingersoll J. A contingent claim's valuation of convertible securities, Journal of Financial Economics, 1977, 4:289–322.
Valuing Convertible Bonds as Derivatives, Goldman Sachs Quantitative Strategies Research Notes, Nov, 1994.
Nyborg K G. The use and pricing of convertible bonds, Applied Mathematical Finance, 1996, 3:167–190.
Tsiveritotis K, Fernandes C. Valuing Convertible bonds with credit risk, Journal of Fixed Income, 1998, 8:95–102.
Author information
Authors and Affiliations
Additional information
Supported by the National Science Foundation of China (10201029).
Rights and permissions
About this article
Cite this article
Shuguang, Z., Shuiyong, Y. & Lijun, W. Prices of asian options under stochastic interest rates. Appl. Math.- J. Chin. Univ. 21, 135–142 (2006). https://doi.org/10.1007/BF02791350
Received:
Issue Date:
DOI: https://doi.org/10.1007/BF02791350