Abstract
Traditional derivative pricing theories usually focus on the risk-neutral price or the equilibrium price. However, in highly competitive financial markets, we observed two prices which are called bid and ask prices; then the unique risk-neutral price fails to hold. In this paper, within the framework of conic finance, we provide a useful approach to evaluate the ask and bid prices of geometric Asian options and obtain the explicit formulas for the ask and bid prices. Finally, numerical examples show that the higher the market liquidity parameter γ, the wider the spread and hence the less the liquidity.
Highlights
Asian options give the holder a payoff that depends on the average price of the underlying over some prescribed period
Within the framework of conic finance, we lead to the explicit formulas for the ask and bid prices of geometric Asian option
Within the framework of conic finance, we derive the explicit formulas for the bid-ask prices of geometric Asian options
Summary
Asian options give the holder a payoff that depends on the average price of the underlying over some prescribed period. In [15,16,17,18], statistical studies are used to model bid-ask spread These models are not effective enough to explain the magnitude of the spreads observed in the markets. In the conic finance framework, the market acts as a passive counterparty to all transactions, buying at the ask price and selling at the bid price. To the best of our knowledge, there is no literature research on valuation of ask and bid prices for geometric Asian option. Within the framework of conic finance, we lead to the explicit formulas for the ask and bid prices of geometric Asian option. We finish our paper by concluding remarks in the last section
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