ANALYTIC APPROXIMATION OF SOME EXOTIC OPTIONS

Yuri Boykov, Peter Carr

Research paper, 1996

Abstract

P. Carr and D. Faguet have suggested the method of lines to approximate solutions to partial differential equations arising in mathematical finance. We extend their idea to valuing Asian options and options on stocks paying constant continuous dividends. We find an exact general solution for a recursive system of non-homogeneous ordinary differential equations that approximates these options values. The numerical implementation indicates computationally efficient convergence of approximation errors to zero.


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