Effcient Algorithms for Average-Rate Option Pricing

Abstract

Average-rate options are sophisticated exotic derivatives whose payoff depends on the average value of the underlying asset. Pricing the geometric average-rate options by the lattice model and the combinatorial approach is presented in this paper. The lattice model can also price arithmetic average interest rate options under the Hull-White model. For the harder arithmetic average-rate equity option pricing, a sophisticated method for constructing the lattice is proposed. Comprehensive experimental results show that this novel approach offers more accurate results than existing methods.