Re: Aluminium Asian Digital Options

---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 07/27/2000
05:40 PM ---------------------------

Zimin Lu
07/27/2000 03:08 PM
To: Anjam Ahmad/LON/ECT@ECT
cc: Stinson Gibner/HOU/ECT@ECT (bcc: Vince J Kaminski/HOU/ECT)
Subject: Re: Aluminium Asian Digital Options

Anjam,

We can use moment matching to find the "effective" volatility and dividend
yield for the average.
Then we can apply the European digital option formula. Attached please find
the c-code I did
for Asian spread option, when I find the effective vol and drift for both
averages then find the option
value by calling the European spread option. You can do just the same for
the Asian digital option.

It would be nice to do a Monte-Carlo, just checking the accuracy of the
approximation.

It was nice to have you here, we are impressed by the work you have done.
Keep up the good work.

Zimin

Enron Capital & Trade Resources Corp. - Europe

From: Anjam Ahmad 07/27/2000 10:14 AM

To: Zimin Lu/HOU/ECT@ECT
cc:
Subject: Aluminium Asian Digital Options

Hi Zimin,

Russell Placket of MG Metals just talked to me about the issue of pricing a
strip of twelve monthly Asian digital options on LME aluminium. As I
understand, the payoff to the customer is a fixed cash amount that wil be
paid if the average of the closing prices of aluminium for a month are
greater than the strike agreed in advance, where holiday days do not
contribute to the average.

Russell mentioned that this would be a set of 12 monthly options starting in
Jan-01, and that the LME price for Jan-01 of $1572.5 (which is the future
converging to the spot price on the 3rd Wednesday in Jan 01) can be used as a
proxy/estimate for the average for the month.

Do you have a model for asian digitals or should I proceed with Monte Carlo
to price this, maybe using European digital option model as control variate?

Thanks,

Anjam
x35383