Discrete Geometric Average Asian Engines

[Kakhkhor Abdijalilov]

Do analytic Asian engines incorporate term structure information? From
the implementation it looks like both risk free rate and dividend
yield are assumed to be constant and volatility is set to Black's
volatility (is that the volatility implied by Black-Scholes formula?).

Regards,
Kakhkhor Abdijalilov.

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[Luigi Ballabio]

On Sat, 2010-10-16 at 21:29 -0500, Kakhkhor Abdijalilov wrote:
> Do analytic Asian engines incorporate term structure information?

In a way.  If you pass risk-free rate and dividend yields r(t) and q(t)
and an implied-volatility surface sigma(t,k), the engine for an Asian
option with maturity T and strike K will extract r(T), q(T) and
sigma(T,K) and use those as constant values in the formula.

Luigi


--

Greenspun's Tenth Rule of Programming:
Any sufficiently complicated C or Fortran program contains an
ad-hoc, informally-specified bug-ridden slow implementation of
half of Common Lisp.



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