The parallel solution of early-exercise Asian options with stochastic volatility

This paper describes an parallel semi-Lagrangian finite difference approach to the pricing of early exercise Asian Options on assets with a stochastic volatility. A multigrid procedure is described for the fast iterative solution of the discrete linear complementarity problems that result. The accuracy and performance of this approach is improved considerably by a strike-price related analytic transformation of asset prices. Asian options are contingent claims with payoffs that depend on the average price of an asset over some time interval. The payoff may depend on this average and a fixed strike price (Fixed Strike Asians) or it may depend on the average and the asset price (Floating Strike Asians). The option may also permit early exercise (American contract) or confine the holder to a fixed exercise date (European contract). The Fixed Strike Asian with early exercise is considered here where continuous arithmetic averaging has been used. Pricing such an option where the asset price has a stochastic volatility leads to the requirement to solve a tri-variate partial differential inequation in the three state variables of asset price, average price and volatility (or equivalently, variance). The similarity transformations [6] used with Floating Strike Asian options to reduce the dimensionality of the problem are not applicable to Fixed Strikes and so the numerical solution of a tri-variate problem is necessary. The computational challenge is to provide accurate solutions sufficiently quickly to support realtime trading activities at a reasonable cost in terms of hardware requirements.

Reasoning about change over time: Actions, events and their effects

This paper presents a new formalism for reasoning about change over time. The formalism derives a clean separation between the notion of states and situations. It allows more flexible temporal causal relationships than do other formalisms for reasoning about causal change, such as the situation calculus and the event calculus. It includes effects that start during, immediately after, or some time after their causes, and which end before, simultaneously with, or after their causes. A formal distinction between actions, action-types and events is proposed, which allows the expression of common-sense causal laws at high level. It is shown how these laws can be used to deduce state change over time at low level, when events occur under certain preconditions hold. Two problems that beset most interval-based temporal systems, i.e., the so-called dividing instant problem and intermingling problem, are absent from the formalism.