Path integral pricing of outside barrier Asian options

Abstract

Using the path-integral framework to cast the pricing problem of the outside barrier Asian option into a Wiener functional integral form, we show that, after the introduction of a law-equivalent process and transformation of the new system, the deviation from the Monte Carlo price is seen to be widely reduced. Bypassing the path-partitioning step, we show that our results behave nicely with respect to increasing correlation. After putting forward empirical evidence of this improvement, we extend the scope to a double knock-out outside barrier, and derive there an original formula. In the latter setting, we propose a simple scheme to reduce the relative error due to a nearby knock-out barrier.