1 February 2011
M. Bernhart, P. Tankov, X. Warin
We propose a method for pricing American options whose pay-o depends on the moving average of the underlying asset price. The method uses a nite dimensional approximation of the innite-dimensional dynamics of the moving average process based on a truncated Laguerre series expansion. The resulting problem is a finite-dimensional optimal stopping problem, which we propose to solve with a least squares Monte-Carlo approach. We analyze the theoretical convergence rate of our method and present numerical results in the Black-Scholes framework.