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NAG Library Manual

NAG Library Routine DocumentS30SAF

Note:  before using this routine, please read the Users' Note for your implementation to check the interpretation of bold italicised terms and other implementation-dependent details.

1  Purpose

S30SAF computes the Asian geometric continuous average-rate option price.

2  Specification

 SUBROUTINE S30SAF ( CALPUT, M, N, X, S, T, SIGMA, R, B, P, LDP, IFAIL)
 INTEGER M, N, LDP, IFAIL REAL (KIND=nag_wp) X(M), S, T(N), SIGMA, R, B, P(LDP,N) CHARACTER(1) CALPUT

3  Description

S30SAF computes the price of an Asian geometric continuous average-rate option for constant volatility, $\sigma$, risk-free rate, $r$, and cost of carry, $b$ (see Kemna and Vorst (1990)). For a given strike price, $X$, the price of a call option with underlying price, $S$, and time to expiry, $T$, is
 $Pcall = S e b--r T Φ d- 1 - X e-rT Φ d- 2 ,$
and the corresponding put option price is
 $Pput = X e-rT Φ -d-2 - S e b--r T Φ - d-1 ,$
where
 $d-1 = lnS/X + b- + σ-2 / 2 T σ- T$
and
 $d-2 = d-1 - σ- T ,$
with
 $σ- = σ 3 , b- = 1 2 b- σ2 6 .$
$\Phi$ is the cumulative Normal distribution function,
 $Φx = 1 2π ∫ -∞ x exp -y2/2 dy .$

4  References

Kemna A and Vorst A (1990) A pricing method for options based on average asset values Journal of Banking and Finance 14 113–129

5  Parameters

1:     CALPUT – CHARACTER(1)Input
On entry: determines whether the option is a call or a put.
${\mathbf{CALPUT}}=\text{'C'}$
A call. The holder has a right to buy.
${\mathbf{CALPUT}}=\text{'P'}$
A put. The holder has a right to sell.
Constraint: ${\mathbf{CALPUT}}=\text{'C'}$ or $\text{'P'}$.
2:     M – INTEGERInput
On entry: the number of strike prices to be used.
Constraint: ${\mathbf{M}}\ge 1$.
3:     N – INTEGERInput
On entry: the number of times to expiry to be used.
Constraint: ${\mathbf{N}}\ge 1$.
4:     X(M) – REAL (KIND=nag_wp) arrayInput
On entry: ${\mathbf{X}}\left(i\right)$ must contain ${X}_{\mathit{i}}$, the $\mathit{i}$th strike price, for $\mathit{i}=1,2,\dots ,{\mathbf{M}}$.
Constraint: ${\mathbf{X}}\left(\mathit{i}\right)\ge z\text{​ and ​}{\mathbf{X}}\left(\mathit{i}\right)\le 1/z$, where $z={\mathbf{X02AMF}}\left(\right)$, the safe range parameter, for $\mathit{i}=1,2,\dots ,{\mathbf{M}}$.
5:     S – REAL (KIND=nag_wp)Input
On entry: $S$, the price of the underlying asset.
Constraint: ${\mathbf{S}}\ge z\text{​ and ​}{\mathbf{S}}\le 1.0/z$, where $z={\mathbf{X02AMF}}\left(\right)$, the safe range parameter.
6:     T(N) – REAL (KIND=nag_wp) arrayInput
On entry: ${\mathbf{T}}\left(i\right)$ must contain ${T}_{\mathit{i}}$, the $\mathit{i}$th time, in years, to expiry, for $\mathit{i}=1,2,\dots ,{\mathbf{N}}$.
Constraint: ${\mathbf{T}}\left(\mathit{i}\right)\ge z$, where $z={\mathbf{X02AMF}}\left(\right)$, the safe range parameter, for $\mathit{i}=1,2,\dots ,{\mathbf{N}}$.
7:     SIGMA – REAL (KIND=nag_wp)Input
On entry: $\sigma$, the volatility of the underlying asset. Note that a rate of 15% should be entered as 0.15.
Constraint: ${\mathbf{SIGMA}}>0.0$.
8:     R – REAL (KIND=nag_wp)Input
On entry: $r$, the annual risk-free interest rate, continuously compounded. Note that a rate of 5% should be entered as 0.05.
Constraint: ${\mathbf{R}}\ge 0.0$.
9:     B – REAL (KIND=nag_wp)Input
On entry: $b$, the annual cost of carry rate. Note that a rate of 8% should be entered as $0.08$.
10:   P(LDP,N) – REAL (KIND=nag_wp) arrayOutput
On exit: the leading ${\mathbf{M}}×{\mathbf{N}}$ part of the array P contains the computed option prices.
11:   LDP – INTEGERInput
On entry: the first dimension of the array P as declared in the (sub)program from which S30SAF is called.
Constraint: ${\mathbf{LDP}}\ge {\mathbf{M}}$.
12:   IFAIL – INTEGERInput/Output
On entry: IFAIL must be set to $0$, $-1\text{​ or ​}1$. If you are unfamiliar with this parameter you should refer to Section 3.3 in the Essential Introduction for details.
For environments where it might be inappropriate to halt program execution when an error is detected, the value $-1\text{​ or ​}1$ is recommended. If the output of error messages is undesirable, then the value $1$ is recommended. Otherwise, if you are not familiar with this parameter, the recommended value is $0$. When the value $-\mathbf{1}\text{​ or ​}\mathbf{1}$ is used it is essential to test the value of IFAIL on exit.
On exit: ${\mathbf{IFAIL}}={\mathbf{0}}$ unless the routine detects an error or a warning has been flagged (see Section 6).

6  Error Indicators and Warnings

If on entry ${\mathbf{IFAIL}}={\mathbf{0}}$ or $-{\mathbf{1}}$, explanatory error messages are output on the current error message unit (as defined by X04AAF).
Errors or warnings detected by the routine:
${\mathbf{IFAIL}}=1$
On entry, ${\mathbf{CALPUT}}\ne \text{'C'}$ or $\text{'P'}$.
${\mathbf{IFAIL}}=2$
On entry, ${\mathbf{M}}\le 0$.
${\mathbf{IFAIL}}=3$
On entry, ${\mathbf{N}}\le 0$.
${\mathbf{IFAIL}}=4$
On entry, ${\mathbf{X}}\left(\mathit{i}\right) or ${\mathbf{X}}\left(\mathit{i}\right)>1/z$, where $z={\mathbf{X02AMF}}\left(\right)$, the safe range parameter.
${\mathbf{IFAIL}}=5$
On entry, ${\mathbf{S}} or ${\mathbf{S}}>1.0/z$, where $z={\mathbf{X02AMF}}\left(\right)$, the safe range parameter.
${\mathbf{IFAIL}}=6$
On entry, ${\mathbf{T}}\left(\mathit{i}\right), where $z={\mathbf{X02AMF}}\left(\right)$, the safe range parameter.
${\mathbf{IFAIL}}=7$
On entry, ${\mathbf{SIGMA}}\le 0.0$.
${\mathbf{IFAIL}}=8$
On entry, ${\mathbf{R}}<0.0$.
${\mathbf{IFAIL}}=11$
On entry, ${\mathbf{LDP}}<{\mathbf{M}}$.

7  Accuracy

The accuracy of the output is dependent on the accuracy of the cumulative Normal distribution function, $\Phi$. This is evaluated using a rational Chebyshev expansion, chosen so that the maximum relative error in the expansion is of the order of the machine precision (see S15ABF and S15ADF). An accuracy close to machine precision can generally be expected.

None.

9  Example

This example computes the price of an Asian geometric continuous average-rate put with a time to expiry of $3$ months, a stock price of $80$ and a strike price of $85$. The risk-free interest rate is $5%$ per year, the cost of carry is $8%$ and the volatility is $20%$ per year.

9.1  Program Text

Program Text (s30safe.f90)

9.2  Program Data

Program Data (s30safe.d)

9.3  Program Results

Program Results (s30safe.r)