2000/05/19 by Andrew Matacz, Matacz, Andrew
Economics, Econometrics and Finance · #Stochastic processes and financial applications #Capital Investment and Risk Analysis
paper · pdf · doi:10.48550/arxiv.cond-mat/0005319
In this paper I develop a new computational method for pricing path dependent\noptions. Using the path integral representation of the option price, I show\nthat in general it is possible to perform analytically a partial averaging over\nthe underlying risk-neutral diffusion process. This result greatly eases the\ncomputational burden placed on the subsequent numerical evaluation. For\nshort-medium term options it leads to a general approximation formula that only\nrequires the evaluation of a one dimensional integral. I illustrate the\napplication of the method to Asian options and occupation time derivatives.\n