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Analytic bounds and approximations for annuities and Asian options. (English) Zbl 1141.91550

Summary: Even in case of the Brownian motion as most natural rate of return model it appears too difficult to obtain analytic expressions for most risk measures of constant continuous annuities. In literature the so-called comonotonic approximations have been proposed but these still require the evaluation of integrals. In this paper we show that these integrals can sometimes be computed, and we obtain explicit approximations for some popular risk measures for annuities.
Next, we show how these results can be used to obtain fully analytic expressions for lower and upper bounds for the price of a continuously sampled European-style Asian option with fixed exercise price. These analytic lower bound prices are as sharp as those of L. C. G. Rogers and Z. Shi [J. Appl. Probab. 32, 1077–1088 (1995; Zbl 0839.90013)], if not sharper, but in contrast do not require any longer the evaluation of a two-dimensional or a one-dimensional integral.

MSC:

91B30 Risk theory, insurance (MSC2010)

Citations:

Zbl 0839.90013
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References:

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