Asian option What is it?
An Asian option also called an average option is an option whose payoff is linked to the average value of the underlier on a specific set of dates during the life of the option. There are two basic forms: 1. An average price option is a cash-settled option whose payoff is based on the difference between the average value of the underlier during the life of the option and a fixed strike.
An average strike option is a cash settled or physically settled option. How is it constructed?
Exotic options: binary (aka, digital) option (FRM T3-44)
Premiums are paid in advance. Due to the reduced potential for the buyer to receive a large payoff, they cost less than a corresponding vanilla option.
Can be structured as both American and European options.
When is it used? They are commonly traded on currencies and commodity products which have low trading volumes.
End-users of commodities or energy related products tend to be exposed to average prices over time, so Asian options are attractive for them. Asian options are also popular with corporations, such as exporters, who have ongoing currency exposures. What are the benefits?
Binary Asian option tend to be less expensive—sell at lower premiums—than comparable vanilla puts or binary Asian option. This is due to their lower levels of volatility making them cheaper.
As a rule of thumb they are generally cheaper than their European counterparts. Share this:.
By James Chen Updated Mar 8, An Asian option is an option type where the payoff depends on the average price of the underlying asset over a certain period of time as opposed to standard options American and European where the payoff depends on the price of the underlying asset at a specific point in time maturity.