What are Asian Options?
The name “Asian” option has no particular significance. David Spaughton tells the story of how both he and Mark Standish were both working for Bankers Trust in 1987. They were in Tokyo on business when they developed the first commercially used pricing formula for options linked to the average price of crude oil. Because they were in Asia, they called the options “Asian options.
Sometimes referred to as an average strike rate option, the Asian option is based on the idea of paying out an amount that is determined by calculating the average of the underlier. While the process for calculating Asian options is somewhat more detailed than an American-style option or the European-style option, the task is still relatively straightforward when compared to exotic options. Determining the exercise price is the key to understanding how Asian options work. In order to arrive at the exercise price, the average price of the underlying security for a specified period is identified. As an example, the price activity for the security over a period of six months to a year may be charted, and the average price calculated from that data. Once the average is determined, a fixed discount is applied to that figure. Options of this type are generally considered to be investment opportunities that tend to carry a moderate amount of risk. Because the process of determining the exerci
” Sometimes referred to as an average strike rate option, the Asian option is based on the idea of paying out an amount that is determined by calculating the average of the underlier. While the process for calculating Asian options is somewhat more detailed than an American-style option or the European-style option, the task is still relatively straightforward when compared to exotic options. . Determining the exercise price is the key to understanding how Asian options work. In order to arrive at the exercise price, the average price of the underlying security for a specified period is identified.
