On pricing Asian options under stochastic volatility

This article presents a lattice model suitable forpricing European and American Asian optionsbased on the arithmetic or geometric average ofthe underlying asset prices in a stochastic volatilityframework. The model is flexible enough toaccommodate different specifications of the squaredvolatility and asset price processes. The squaredvolatility process is discretized by a binomial lattice.Then, a subset of asset price realizations anda subset of averages are attached to each node of thesquared volatility lattice to cover the range of possibleasset prices and averages, respectively, at eachtime slice. Since the model works on representativevalues, a double linear interpolation technique isused when solving backward through the tree todetermine the price of the Asian option. Extensivenumerical experiments confirm the accuracy andefficiency of the proposed model.