Skip to main content
SpringerLink
Log in

Asian Options

  • Chapter
Book cover Handbook of Quantitative Finance and Risk Management

Abstract

The payoffs on the expiration dates of Asian options depend on the underlying asset’s average price over some prespecified period rather than on its price at expiration. In this chapter we outline the possible applications of these options and describe the different methodologies and techniques that exist for their evaluation as well as their advantages and disadvantages.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 869.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD 1,099.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    According to legend such options were originally used in 1987 when Bankers Trust’s Tokyo office used them for pricing average options on crude oil contracts.

  2. 2.

    Since most of the options are of the European style, evaluations are provided for the calls, and the puts can be evaluated from the Put-Call parity. For the valuation of American type options, see Ben-Ameur et al. 2002, and Longstaff and Schwartz 2001.

  3. 3.

    If the option is not newly issued and some of the prices that comprise the average have already been observed, then taking that into account, the strike price and the definition of the random variable are adjusted in a straightforward manner.

  4. 4.

    Turnbull and Wakeman claim however that Kemna and Vorst’s result holds true only if the averaging period starts after the initiation (and valuation) of the options. They provide examples showing that when the time to maturity of the option is lower than the averaging period, the value of the Asian option could be higher than that of a standard European option. Geman and Yor 1993, arrive at a similar conclusion.

References

  • Ben-Ameur, H., M. Breton, and P. L’Ecuyer. 2002. “A dynamic programming procedure for pricing American-style Asian options.” Management Science 48, 625–643.

    Article  Google Scholar 

  • Black, F. and M. Scholes. 1973. “The pricing of options and corporate liabilities.” Journal of Political Economy 81, 637–654.

    Article  Google Scholar 

  • Bouaziz, L., E. Briys, and M. Crouhy. 1994. “The pricing of forward-starting Asian options.” Journal of Banking and Finance 18, 823–839.

    Article  Google Scholar 

  • Boyle, P. 1977. “Options: a Monte-Carlo approach.” Journal of Financial Economics 4, 323–338.

    Article  Google Scholar 

  • Carverhill, A. P. and L. J. Clewlow. 1990. “Valuing average rate (‘Asian’) options.” Risk 3, 25–29.

    Google Scholar 

  • Castellacci, G. M. and J. Siclari. 2003. “Asian basket spreads and other exotic options.” Power Risk Management. http://www.olf.com/news/articles/2005/articles_20050610.aspx

  • Cummins, D. J. and H. Geman. 1994. “An Asian option approach to the valuation of insurance futures contracts.” Working paper, Financial Institutions Center University of Pennsylvania 03–94.

    Google Scholar 

  • Curran, M. 1992. “Valuing Asian and portfolio options by conditioning on the geometric mean price.” Management Science 40, 1705–1711.

    Article  Google Scholar 

  • Dhaene, J., M. Denuit, M. J. Goovaerts, R. Kaas, and D. Vyncke. 2002a. “The concept of comonotonicity in actuarial science and finance: applications.” Insurance Mathematics and Economics 31, 133–161.

    Article  Google Scholar 

  • Dhaene, J., M. Denuit, M. J. Goovaerts, R. Kaas, and D. Vyncke. 2002b. “The concept of comonotonicity in actuarial science and finance: theory.” Insurance Mathematics and Economics 31, 3–33.

    Article  Google Scholar 

  • Fu, M., D. Madan, and T. Wang. 1998/1999. “Pricing continuous Asian options: a comparison of Monte Carlo and Laplace transform inversion methods.” The Journal of Computational Finance 2, 49–74.

    Google Scholar 

  • Geman, H. and M. Yor. 1993. “Bessel processes, Asian options, and perpetuities.” Mathematical Finance 3, 349–375.

    Article  Google Scholar 

  • Goovaerts, M. J., J. Dhaene, and A. De Schepper. 2000. “Stochastic upper bounds for present value functions.” Journal of Risk and Insurance Theory 67, 1–14.

    Article  Google Scholar 

  • Hull, J. 2006. Options, Futures, and Other Derivatives, Prentice Hall, NJ.

    Google Scholar 

  • Hull, J. and A. White. 1993. “Efficient procedures for valuing European and American path-dependent options.” Journal of Derivatives 1, 21–31.

    Article  Google Scholar 

  • Ingersoll, J. 1987. Theory of Financial Decision Making, Rowman & Littlefield Publishers.

    Google Scholar 

  • Jacques, M. 1996. “On the hedging portfolio of Asian options” ASTIN Bulletin 26, 165–183.

    Article  Google Scholar 

  • Kaas, R., J. Dhaene, M. J. Goovaerts 2000. “Upper and lower bounds for sums of random variables.” Insurance: Mathematics and Economics 27, 151–168.

    Article  Google Scholar 

  • Kemna, A. G. Z. and A. C. F. Vorst 1990. “A pricing method for options based on average asset values.” Journal of Banking and Finance 14, 113–129.

    Article  Google Scholar 

  • Levy, E. 1992. “Pricing European average rate currency options” Journal of International Money and Finance 11, 474–491.

    Article  Google Scholar 

  • Linetsky, V. 2002. “Exact pricing of Asian options: an application of spectral theory,” Working Paper, Northwestern University.

    Google Scholar 

  • Longstaff, F. A. and E. S. Schwartz 2001. “The Review of Financial Studies” 14, 113–147.

    Google Scholar 

  • Rogers, L. and Z. Shi 1995. “The value of an Asian option” Journal of Applied Probability 32, 1077–1088.

    Article  Google Scholar 

  • Turnbull, S. M. and L. M. Wakeman 1991. “A quick algorithm for pricing European average options.” Journal of Financial and Quantitative Analysis 26, 377–389.

    Article  Google Scholar 

  • Vecer, J. 2001. “A new PDE approach for pricing arithmetic average Asian options.” The Journal of Computational Finance 4, 105–113.

    Google Scholar 

  • Zhang, P. 1995. “Flexible arithmetic Asian options.” Journal of Derivatives 2, 53–63.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. The Hebrew University, Jerusalem, Israel

    Itzhak Venezia

Authors
  1. Itzhak Venezia
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Itzhak Venezia .

Editor information

Editors and Affiliations

  1. Department of Finance and Economics, Rutgers University, 94 Rockafeller Road, Janice H. Levin Bldg., New Brunswick, NJ, 08854-8054, USA

    Cheng-Few Lee

  2. State Street Corp., Boston, MA, 94132, USA

    Alice C. Lee

  3. Center for PBBEF Research, North Brunswick, NJ, USA

    John Lee

Rights and permissions

Reprints and permissions

Copyright information

© 2010 Springer Science+Business Media, LLC

About this chapter

Cite this chapter

Venezia, I. (2010). Asian Options. In: Lee, CF., Lee, A.C., Lee, J. (eds) Handbook of Quantitative Finance and Risk Management. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-77117-5_39

Download citation

Publish with us

Policies and ethics

Search

Navigation