Pricing Asian currency options

Abstract

Derivatives are financial instruments that whose values depend on some underlying assets. Options give the owner the right but not the obligation to buy or sell the underlying asset at a price called exercise price.Path-dependent Options are options whose payoff depends on the price history of the underlying asset. These options play an important role in financial markets. The Asian Option is one of the prominent examples of path-dependent options. An Asian Option is an option whose payoff depends on the arithmetic average price of the asset. PricingAsian Options efficiently and accurately has had long-standing research, and numerous approximation methods are suggested in academicliterature. In Kenya, though Option pricing has not been introduced, there is considerable trading in Currency Options over-the-counter. In this project,I will explore Asian optionpricing on the lattice (binomial and trinomial lattices). A lattice divides the time interval between the option initial date and the maturity date into n equal time steps. Finally,I will use these lattice methods to price Asian currency options in Kenya.