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DiusionModel

Pricing Asian Options under a Hyper-Exponential Jump Di?usion Model Ning Cai1 and S. G. Kou2 1Room 5521, Department of IELM, HKUST 2313 Mudd Building, Department of IEOR, Columbia University ningcai@ust.hk and sk75@columbia.edu June 2011 Abstract We obtain a closed-form solution for the double-Laplace transform of Asian options under the hyper-exponential jump di?usion model (HEM). Similar results are only available previously in the special case of the Black-Scholes model (BSM). Even in the case of the BSM, our approach is simpler as we essentially use only It?o’sformula and do not need more advanced results such as those of Bessel processes and Lamperti’s representation. As a by-product we also show that a well-known recursion relating to Asian options has a unique solution in a probabilistic sense. The double-Laplace transform can be inverted numerically via a two-sided Euler inversion algorithm. Numerical results indicate that our pricing method is fast, stable, and accurate, and performs well even in the case of low volatilities. Subject classi?cations: Finance: asset pricing. Probability: stochastic model applica- tions. Area of review: Financial engineering. 1 Introduction Asian options (or average options), whose payo?s depend on the average of the underlying asset price over a pre-speci?ed time period, are among the most popular path-dependent options traded in both exchanges and over-the-counter markets. A main di?culty in pricing Asian options is that the distribution of the average price may not be available analytically. There is a large body of literature on Asian options under the Black-Scholes model (BSM). For example, approaches based on

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