TY  - JOUR
AU  - Chacko,George
AU  - Das,Sanjiv Ranjan
TI  - Average Interest
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6045
PY  - 1997
Y2  - May 1997
UR  - http://www.nber.org/papers/w6045
L1  - http://www.nber.org/papers/w6045.pdf
N1  - Author contact info:
George Chacko
National Institutes on Health
E-Mail: chackoge@csr.nih.gov

Sanjiv Das
Dept. of Finance
Santa Clara University
321E Lucas Hall, 500 El Camino Real
Santa Clara, CA 95053
E-Mail: srdas@scu.edu
AB  - 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.
ER  -