We present a rigorous study of the short maturity asymptotics for Asian options with continuous-time averaging, under the assumption that the underlying asset follows a local volatility model.

The asymptotics for out-of-the-money, in-the-money, and at-the-money cases are derived, considering both fixed strike and floating strike Asian options. The asymptotics for the out-of-the-money case involve a nontrivial variational problem which is solved completely.

We present an analytical approximation for Asian options prices and demonstrate good numerical agreement of the asymptotic results with the results of Monte Carlo simulations and benchmark test cases in the Black--Scholes model for option parameters relevant in practical applications.

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Approximations for Asian options in local volatility models

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Short Maturity Asian Options in Local Volatility Models | SIAM Journal on Financial Mathematics | Vol. 7, No. 1 | Society for Industrial and Applied Mathematics

Keywords Asian options , short maturity , local volatility , large deviations , variational problem. AMS Subject Headings 91G20 , 91G80 , 60F Society for Industrial and Applied Mathematics.

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Dan Pirjol and Lingjiong Zhu. Banner art adapted from a figure by Hinke M. Osinga and Bernd Krauskopf University of Auckland, NZ.