Pricing European average rate currency options
Abstract
This paper develops a simple methodology that yields closed-form analytical approximations for valuing European option claims involving the arithmetic average offuture foreign exchange rates. The main advantage of the approach is that it avoids the need to adopt time-consuming numerical procedures.
The precision of the resulting formula, and the distributional assumption that underlies it, is examined by way of Monte Carlo simulations. (JEL F3 1)