Skip to content




Pricing Asian Options

The Asian option payoff depends on the average price of the underlying asset over a specific period of time.  The expected payoff of an Asian option is less than the expected payoff of a European option and is therefore much cheaper.  On the plus side, the Asian option takes away some of the point of time risks embedded in European options and allow for more stable payoffs.

The payoff of an Asian option simply replaces the expiration price with the average price:

Asian Option Payoff

The problem with Asian options (and most exotic options) is that the option price cannot be calculated by simply plugging numbers into the Black-Scholes equation because the payoff depends on the path that the stock price takes until the maturity of the option.  The first way to calculate the price is to use a binomial or trinomial tree, but the speed of computers and flexibility of implementation has made monte carlo simulations the more practical method for pricing.

For those of you who are interested in learning how to price an exotic option using Monte Carlo simulations, I have produced an excel spreasheet with modifiable code that is for sale:

Asian Option Pricer

 

 
Price Arithmetic and Geometric Asian Options with Monte Carlo Simulations through an Excel VBA Macro.



 

Be Sociable, Share!

Posted in Derivatives, Educational.

Tagged with , , , , , , , , , , , , .


0 Responses

Stay in touch with the conversation, subscribe to the RSS feed for comments on this post.



Some HTML is OK

or, reply to this post via trackback.



Get Adobe Flash player
Copyright © 2009-2013 SurlyTrader DISCLAIMER The commentary on this blog is not meant to be taken as an investment advice. The author is not a registered investment adviser. There is no substitute for your own due diligence. Please be aware that investing is inherently a risky business and if you chose to follow any of the advice on this site, then you are accepting the risks associated with that investment. The Author may have also taken positions in the stocks or investments that are being discussed and the author may change his position at any time without warning.

Yellow Pages for USA and Canada SurlyTrader - Blogged

ypblogs.com