An exact and explicit formula for pricing Asian options with regime switching

摘要

This paper studies the pricing of European-style Asian options when the pricedynamics of the underlying risky asset are assumed to follow a Markov-modulated geometric Brownian motion; that is, the appreciation rate and thevolatility of the underlying risky asset depend on unobservable states of theeconomy described by a continuous-time hidden Markov process. We derive theexact, explicit and closed-form solutions for European-style Asian options in atwo-state regime switching model.