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I'm looking to use the geometric asian option as a control variable for a monte carlo simulation. However, I have an issue with the closed-form equation to get the geometric price.

I'm using the formula from a previous related Q&A on this site:

enter image description here

When I compute it for T=1, it gives me the right price. But when T > 1, the price found is different from the solution that I get from MC.

With the parameters below, I get 9.124 and something around 9.65 with MC (SE = 0.02).

Here is the code I use:

import numpy as np
from scipy.stats import norm 
np.random.seed(1) 
    
    #### Closed form equation for geometric asian option ####
def BS_geo(S0,K,T,vol,r,n,type):
    varbis = vol**2 *   (((n+1)*(2*n+1))/(6*(n**2)))
    rbis = (varbis/2) + (r-((vol**2)/2)) * ((n+1)/(2*n))
    d1 = (np.log(S0/K) + (  (rbis+0.5*varbis)*T)) / np.sqrt(varbis)*np.sqrt(T)
    d2 = d1 - (np.sqrt(varbis)*np.sqrt(T))
    if type == "Call":
        price = np.exp(-r*T) * (S0*np.exp(rbis*T)*norm.cdf(d1)-K*norm.cdf(d2))
    else:
        price = np.exp(-r*T) * (K*norm.cdf(-d2) - S0*np.exp(rbis*T)*norm.cdf(-d1))
    return price

S0=100
K=105
T=3
vol = 0.25
r = 0.05
n= 100
type = "Call"

print(BS_geo(S0,K,T,vol,r,n,type))

When I compute it for different T between 1 and 20, here is what I got. Orange line is from Monte Carlo and the blue one from the closed-form equation.

enter image description here

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  • $\begingroup$ is there a reason you're discounting by np.exp(-rbis*T) rather than np.exp(-r*T)? perhaps that's the source of the discrepancy $\endgroup$
    – donpicante
    Aug 5 at 4:44
  • $\begingroup$ I have slightly modify my question for greater clarity. I've also modify np.exp(-rbisT) into np.exp(-rT) but it is not enough to give me the right answer :/ $\endgroup$
    – Vpaq
    Aug 5 at 7:50
  • $\begingroup$ Exactly where did you get the formula (screenshot) in your question from? $\endgroup$
    – Alper
    Aug 5 at 9:42
  • $\begingroup$ I took it from here quant.stackexchange.com/questions/68929/… and I saw the same here: macsphere.mcmaster.ca/handle/11375/23088 but if you have another source, I would be grateful :) $\endgroup$
    – Vpaq
    Aug 5 at 9:44
  • $\begingroup$ @Vpaq Sorry, I don't. In which page(s) in the second source (thesis) is the same formula given? $\endgroup$
    – Alper
    Aug 5 at 10:58

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