An analytical approximation for pricing VWAP options |
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Authors: | Hideharu Funahashi Masaaki Kijima |
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Institution: | 1. Mizuho Securities Co. Ltd., Otemachi First Square 1-5-1, Otemachi, Chiyoda-ku, Tokyo, 100-0004Japan.;2. Master of Finance Program, Tokyo Metropolitan University, Marunouchi Eiraku Bldg. 1-4-1-18F, Marunouchi, Chiyoda-ku, Tokyo, 100-0005Japan. |
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Abstract: | This paper proposes a unified approximation method for various options whose pay-offs depend on the volume weighted average price (VWAP). Despite their popularity in practice, very few pricing models have been developed in the literature. Also, in previous works, the underlying asset process has been restricted to a geometric Brownian motion. In contrast, our method is applicable to the general class of continuous Markov processes such as local volatility models. Moreover, our method can be used for any type of VWAP options with fixed-strike, floating-strike, continuously sampled, discretely sampled, forward-start and in-progress transactions. |
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Keywords: | Average option VWAP option Local volatility model Mean-reverting process |
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