The valuation of path dependent contracts on the average

The valuation of path dependent contracts on the average

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Article ID: iaor19941693
Country: United States
Volume: 39
Issue: 10
Start Page Number: 1202
End Page Number: 1213
Publication Date: Oct 1993
Journal: Management Science
Authors: , ,
Keywords: values, finance & banking
Abstract:

This article values option contracts based on the average price realized over a finite time horizon. Such contracts are of importance to traders who periodically transact in spot markets and who require protection from adverse moves in their total accrued costs realized over their trading horizons. Explicit valuation models for pricing a variety of path dependent contracts based on geometric and arithmetic averages are developed. The early exercise features of American contracts are investigated, and it is shown that this feature has significant value.

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