Bouaziz, Briys Crouhy1994 BBC1994

Forward-Start Asian Options

Approximation Milesky Posner1998
Reciproal Gamma
DistributionFinite Time Period
BBC1994

, 168 (037)651188
5111(037)651220E-mailjiangfinance@ydu.edu.tw

Forward-Start Asian Option

Reciproal Gamma Distribution

I-Ming Jiang

Department of Finance
Yu Da College of Business

ABSTRACT

Forward-start Asian options were first proposed by Bouaziz, Briys and Crouhy
(1994) (hereafter BBC) and first-order Talyor's expansion was employed to find an
approximate close-formed solution for the option. This article proposes another
approximate close-formed solution, which is different from the one used by BBC. We
incorporate the result from Milesky and Posner (1998), the limit of the sum of
lognormal distribution is equal to reciproal gamma distribution.

KeywordsExotic option, Asian option, Reciproal Gamma Distribution, Put-Call

parity

1.
Asian OptionsAverage Options

Forward-Start Asian Options

The Closed-Form Solution

BBC1994
BBC1994 Milesky Posner1998

Reciproal Gamma Distribution

BBC1994

2 Risk-Neutral
Valuation
Girsanov
3
Fixed Strike PriceFloating Strike Price
Girsanov
Put-Call Parity

Symmetry 4 Milesky Posner1998

2.

2.1
1.Geometric Brownian Motion
2.
3.
4.
5.

Risk-Neutral Probability Measure Q

,1

dS
= (r q ) dt + S dz SQ ,
S

S r q
S Volatility dz SQ
Increment of Standard Brownian Motion

2.2
Q

Ct T CT f (ST , K T ) S T
KT t
0 t < T 2
Ct = e r (T t ) E Q [CT Ft ] = e r (T t ) E Q [ f (ST , KT ) Ft ] .

1 Musiela, M. M. Rutkowski
1997, Martingale Methods in Financial Modelling, pp109-115
Harrision, M. and D. Krep.1979

2 t Ct
Q
r

3.

Girsanov

3.1

c fixed (K , S0 , r , q, T ) c floating ( , S0 , r , q, T )
0 3
c fixed (K , S0 , r , q, T ) = c fixed = e rT E Q ( AT K ) +

c floating ( , S0 , r , q, T ) = c floating = e rT E Q (ST AT ) +

K S0 0 4

AT =

1 T
Su du
h T h

AT K 3
4
AT
AT

AT AT S T

1 BBC1994
3


34
c fixed (K , S0 , r , q, T )

T c floating ( , S0 , r , q, T )

p fixed (K , S0 , r , q, T )
p floating ( , S0 , r , q, T ) 0

p fixed (K , S0 , r , q, T ) = p fixed = e rT E Q ( K AT ) +

p floating ( , S0 , r , q, T ) = p floating = e rT E Q ( AT ST ) +

3.2
Girsanov 1A
1B
1A45
1B3
6

1
A c floating ( , S0 , r , q, T ) = p fixed (S0 , S0 , q, r , T )

K
B c fixed (K , S0 , r , q, T ) = p floating , S 0 , q, r , T

S0

AB r
q
A

cfloating

c floating
S0

S e rT (ST AT )+
e rT Q
+
E (ST AT ) = E Q T

ST
S0
S0

Girsanov 5 Q
R
2

S T + S zTQ
S T e rT
dR
= T =
=e 2
dQ
S 0 e qT

R dz tR = dz tQ S dt

87

[(

c*flaoting = e qT E R AT*

AT* =

)]
+

AT

ST

9 AT*

q
AT*

Girsanov Karatzas, I. S. Shreve1991,

Brownian Motion and Stochastic Calculus, 2nd Ed, Springer-Varlag,pp190-196.

T
1 T 2
T

Q
2
1

E exp 2 t dt < T = exp t dz S 2 t dt R

dz SR = dz SQ t dt

E Q [T 1A ] = E R [1A ] 1A
5

 AT*

AT* =

AT 1 T Su
1 T
=
du = Su* (T )du
T

h
ST h
ST
h T h

10a

S u* (T )

Su

1
= exp r q S2 (T u ) S zTQ z uQ
ST
2

1
= exp r q + S2 (u T ) + S z uR zTR
2

10b

Reflection Principle
d

z uR zTR = z uRT ~ bTRu = bTR buR ~

bTRu R
10a10b
1

AT* ~ ATb

( r q + S2 )( u T ) + S bTR u
1 T
2
e
du
h T h
1

1 h ( q r 2 S2 ) v + S bvR
e
dv
h 0

11

11
A
r q

BA

( AT S T )+ (S T

AT ) = AT S T
+

12

( AT

K ) (K AT ) = AT K
+

13

1213
r

e rT E Q ( AT S T ) e rT E Q (S T AT ) = e rT E Q ( AT ) e rT E Q (S T )
+

e rT E Q ( AT K ) e rT E Q (K AT ) = e rT E Q ( AT ) e rT K
+

p floating ( , S 0 , r , q, T ) c floating ( , S 0 , r , q, T ) =

1
(e qT e rh q (T h ) ) S 0 S 0 e qT
(r q )h
14

c fixed (K , S 0 , r , q, T ) p fixed (K , S 0 , r , q, T ) =

1
(e qT e rh q (T h ) ) S 0 e rT K
(r q )h
15

A =

S0

K
c floating , S 0 , r , q, T = p fixed (K , S 0 , q, r , T )

S0

15 r q 14
15B

4 Milesky Posner1998

BBC1994

1 E

(S T ) = S 0 E Q e (r q )T +
1
2

2
S

Q
S zT

)= S e
0

( r q )T

The Law of Iterated Conditional Expectations

T
(r q 12 S2 )(u (T h ))+ S zuQ (T h )
1
1 T
E Q ( AT ) = E Q S u du = E Q S T h E Q e
FT h du
T
h

T
h

h
h
(
r q )h
(
r q )T
(
r q )(T h )
T
1
e
e
1 Q
e
S 0
E (S T h ) =
= E Q S T h e (r q )(u (T h )) du =
T h
(r q )h
(r q )h
h

4.
4.1 Milesky Posner1998

4.2 3.2 4.1

4.3

4.1
[T h, T ] ST h

I [T h , T ] :=

ST h

T h

16

Su du

1Milesky Posner1998
1
1 r q S2 < 0
2

1
I = lim I [T h, T ] := lim
T
T S
T h

T h

Su du

f RG ( , )

I 7

f RG ( , ) =

2(q r )

S2

+ 1, =

S2
2

1 9
8

1
1
Pr (I y ) = lim Pr (I [T h ,T ] y ) = lim Pr
= F ,
I

T
T

y
[T h ,T ] y
I y
y
Milesky Posner1998 418-420

1 3.1

2
1
r q S2 < 0 0
2

c fixed

e qT e rh q (T h )

1
S 0 F 1, e rT KF ,
=
(r q )h

17

qT
rh q (T h )

1
e e
1

p fixed = e rT K 1 F ,
S 0 1 F 1, 18
(r q )h
K

F (a , ) = f (x , )dx
a

1
17
Black-Scholes
9

1
1
F 1, F , N (d1 ) N (d 2 )

K
K

4.2
4.1

3
1
q r S2 < 0 8 0
2

e (q r )T e (q r )(T h )
1
c floating = e qT S 0 1 F ,
(q r )h

S0

1
1 F 1, 19

S0

e (q r )T e (q r )(T h ) 1

1
p floating = e qT S 0
F 1, F ,
(q r )h

S0

S0

2(q r )

S2

20

+1

0
c floating = e rT E Q ( S T AT ) + = c floating (1, S 0 , r , q, T ) = p fixed (S 0 , S 0 , q, r , T )

e (q r )T e (q r )(T h )
1
1
= e qT S 0 1 F ,
1 F 1,
(q r )h

S0
S0

1AB r q
Milesky Posner1998
r = 3% q = 3.5%
10

S = 25%

2(q r )

S2

+1

1A r q
2 = 1 K = S 0 0

p floating = e rT E Q ( AT S T ) + = p floating (1, S 0 , r , q, T ) = c fixed (S 0 , S 0 , q, r , T )

e (q r )T e (q r )(T h ) 1

F 1, F ,
= e qT S 0
(q r )h

S0

S0

4.3
4.3.1 Delta

1 0

e (q r )T e (q r )(T h )
1
= e qT 1 F ,

(q r )h

S0

c floating
S 0

1
1 F 1,

S0

e (q r )T e (q r )(T h )
1 1
f ,
(q r )h
S0 S0

1
f 1, 21

S0

p floating
S 0

e (q r )T e (q r )(T h ) 1

F 1, F ,
= e qT
(q r )h

S0

S0

1
S0

e (q r )T e (q r )(T h )

(q r )h

1
f 1,

S0

1
f , 22

S0

2 t > 0

c floating
S t

e (q r )(T t ) e (q r )(T t h )
1
= e q (T t ) 1 F ,
(q r )h

S0
11

1
1 F 1,

S0

23

p floating
S t

e (q r )(T t ) e (q r )(T t h ) 1

F 1, F ,
= e q (T t )
(q r )h

S0

S0

24

2122 0 Delta
S0 Delta S0 Delta Slippage
t > 0
Delta t S t Delta S t

4.3.2 Gamma
Gamma 2122
1 0

c 2floating
S 02

e (q r )T e (q r )(T h ) 1

e qT 1
+ 1 +

f 1,
f

(q r )h
S 0 S 0
S0

e (q r )T e (q r )(T h ) 1
f 2,
(q r )h

S0

25

p 2floating
S 02

e qT
S 03

e (q r )T e (q r )(T h ) 1

1
f 1,
f , + 1 +
(q r )h
S0

S0

e (q r )T e (q r )(T h ) 1
f 2,
(q r )h

S0

26

2 t > 0
c 2floating
S t2

p 2floating
S t2

=0

2526 0 Gamma S0
Gamma S0 Gamma
12

Gamma t > 0 Gamma

Gamma S t

6.

BBC1994Linearization

Black-Scholes
(Benchmark)
BBC1994
h BBC1994
h

13

 1
0
c fixed = e rT E Q ( AT K ) +

= e rT E Q AT 1[ AT > K ] e rT KE Q 1[ AT > K ]

1A

9
1A

S
e rT E Q AT 1[ AT > K ] = e rT E Q T h
h

S
= e rT E Q T h
h

y f ( y , )dy F

T h

RG

0 x f (x , )dx FT h

1
K

K
S
1

f (x 1, )dx FT h
= e rT E Q T h

h ( 1) 0

f x

( ) =

, ) =

( )

, x > 0, > 0, > 0

t 1 e t dt Gamma Function F (a , )

F (a , ) =

f (x , )dx
a

x
f (x 1, )
f ,1 b f (x , ) =
( 1)

,1
C F (x , ) = F

a f x

, ) =

f ,
y
f RG ( y , ) = 2 e
y
14

FRG ( y , ) = 1 F ,
y

 1
S
1

FT h F 1,
= e rT E Q T h

K
h ( 1)
1

= e rT E Q {AT FT h }F 1,
K

e qT e rh q (T h )
1

S 0 F 1,
(r q )h
K

y = I [T h ,T ]
f RG ( y , ) 10 d
x =

10 b

10 E Q [I [T h ,T ] ] =

( 1)

ST h
6
h

e rTdx KE Q 1[ AT > K ] = e rT K f RG ( y , )dy

=e

rT

K f (x , )dx = e rT KF ,
K

1
K
0

0
e qT e rh q (T h )
1

S 0 F 1, e rT KF ,
(r q )h
K

0
c fixed =

qT
rh q (T h )

1
e e
p fixed = e rT K 1 F ,
S 0 1 F 1,
(r q )h
K

10

E Q [I [T h ,T ] ] = yf RG ( y , )dy =

1
1
f (x , )dx x =
0
0 x
y

1
1
=
f (x 1, )dx =

0
( 1) 1
44
42444
3 ( 1)

=1

15


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16

the Reciprocal Gamma Distribution, Journal of Financial and Quantitative

Analysis 333, pp409-422.
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17