NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Average Interest

George Chacko, Sanjiv Ranjan Das

NBER Working Paper No. 6045
Issued in May 1997
NBER Program(s):AP

We develop analytic pricing models for options on averages by means of a state-space expansion method. These models augment the class of Asian options to markets where the underlying traded variable follows a mean-reverting process. The approach builds from the digital Asian option on the average and enables pricing of standard Asian calls and puts, caps and floors, as well as other exotica. The models may be used (i) to hedge long period interest rate risk cheaply, (ii) to hedge event risk (regime based risk), (iii) to manage long term foreign exchange risk by hedging through the average interest differential, (iv) managing credit risk exposures, and (v) for pricing specialized options like range-Asians. The techniques in the paper provide several advantages over existing numerical approaches.

download in pdf format
   (377 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6045

Users who downloaded this paper also downloaded* these:
Judd w6004 The Optimal Tax Rate for Capital Income is Negative
Tornell and Velasco w5108 Fixed versus Flexible Exchange Rates: Which Provides More Fiscal Discipline?
Carroll and Dunn w6081 Unemployment Expectations, Jumping (S,s) Triggers, and Household Balance Sheets
Buchinsky and Hunt w5455 Wage Mobility in the United States
Chay and Greenstone w7442 The Impact of Air Pollution on Infant Mortality: Evidence from Geographic Variation in Pollution Shocks Induced by a Recession
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us