Path Dependent Option Pricing: the path integral partial averaging method [article]

Andrew Matacz
2000 arXiv   pre-print
In this paper I develop a new computational method for pricing path dependent options. Using the path integral representation of the option price, I show that in general it is possible to perform analytically a partial averaging over the underlying risk-neutral diffusion process. This result greatly eases the computational burden placed on the subsequent numerical evaluation. For short-medium term options it leads to a general approximation formula that only requires the evaluation of a one
more » ... nsional integral. I illustrate the application of the method to Asian options and occupation time derivatives.
arXiv:cond-mat/0005319v1 fatcat:5w52aksbd5ckfglcfnnx2qkdqm