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Journal of Applied Mathematics
Volume 2014, Article ID 784386, 8 pages
Research Article

Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility

1Department of Mathematics, Sungkyunkwan University, Suwon, Gyeonggi-do 440-746, Republic of Korea
2Department of Mathematics, Yonsei University, Seoul 120-749, Republic of Korea

Received 31 July 2013; Revised 24 November 2013; Accepted 26 November 2013; Published 8 January 2014

Academic Editor: K. S. Govinder

Copyright © 2014 Min-Ku Lee et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


Recently, hybrid stochastic and local volatility models have become an industry standard for the pricing of derivatives and other problems in finance. In this study, we use a multiscale stochastic volatility model incorporated by the constant elasticity of variance to understand the price structure of continuous arithmetic average Asian options. The multiscale partial differential equation for the option price is approximated by a couple of single scale partial differential equations. In terms of the elasticity parameter governing the leverage effect, a correction to the stochastic volatility model is made for more efficient pricing and hedging of Asian options.