# Asian spread option pricing models and computation

An Asian option or average value option is a special type of option contract. For Asian options the payoff is determined by the average underlying price over some pre-set period of time. This is different from the case of the usual European option and American optionwhere the payoff of the option contract depends on the asian spread option pricing models and computation of the underlying instrument at exercise; Asian options are thus one of the basic forms of exotic options.

In general they do not differ in definition, only in how the pay-off is calculated. Because of the averaging feature, Asian options reduce the volatility inherent in the option; therefore, Asian options are typically cheaper than European or American options.

In the s Mark Standish was with the London-based **Asian spread option pricing models and computation** Trust working on fixed income derivatives and proprietary arbitrage trading.

David Spaughton worked as systems analyst in the financial markets with Bankers Trust since when the Asian spread option pricing models and computation of England first gave licences for banks to do foreign exchange options in the London market.

In Standish and Spaughton were in Tokyo on business when "they developed the first commercially used pricing formula for options linked to the average price of crude oil. Conventionally, this means an arithmetic average. In the continuous case, this is obtained by. There also exist Asian options with geometric average ; in the continuous case, this is given by.

A discussion of the problem of pricing Asian options with Monte Carlo methods is given in a paper by Kemna and Vorst. In the path integral approach to option pricing[8] the problem for geometric average can be solved asian spread option pricing models and computation the Effective Classical potential [9] of Feynman and Kleinert. Rogers and Shi solve the pricing problem with a PDE approach. Variance Gamma model can be efficiently implemented when pricing Asian style options.

Then using the Bondesson series representation for generating the variance gamma process shows to increase performance when pricing this type of option. From Wikipedia, the free encyclopedia. Financial Accounting Standards Board. Managing Energy Price Risk. Paul Wilmott on Quantitative Finance. Because some of them are from Japan. 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.

It is more difficult to manipulate the average value of an underlier over an extended period of time than it is to manipulate it just at the expiration of an option. Statistical Mechanics and its Applications Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Options finance Investment Derivatives finance.

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In finance, the style or family of an option is the class into which the option falls, usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American style options. These options—as well as others where the payoff is calculated similarly—are referred to as " vanilla options ". Options where the payoff is calculated differently are categorized as " exotic options ".

Exotic options can pose challenging problems in valuation and hedging. The key difference between American and European options relates to when the options can be exercised:. Where K is the strike price and S is the spot price of the underlying asset. Option contracts traded on futures exchanges are mainly American-style, whereas those traded over-the-counter are mainly European.

Nearly all stock and equity options are American options, while indexes are generally represented by European options. Commodity options can be either style. Traditional monthly American options expire the third Saturday of every month. They are closed for trading the Friday prior. European options expire the Friday prior to the third Saturday of every month. Therefore, they are closed for trading the Thursday prior to the third Saturday of every month. Assuming an arbitrage-free market, a partial differential equation known as the Black-Scholes equation can be derived to describe the prices of derivative securities as a function of few parameters.

Under simplifying assumptions of the widely adopted Black modelthe Black-Scholes equation for European options has a closed-form solution known as the Black-Scholes formula. In general, no corresponding formula exist for American options, but a choice of methods to approximate the price are available for example Roll-Geske-Whaley, Barone-Adesi and Whaley, Bjerksund and Stensland, binomial options model by Cox-Ross-Rubinstein, Black's approximation and others; there is no consensus on which is preferable.

An investor holding an American-style option and seeking optimal value will only exercise it before maturity under certain circumstances. Owners who wish to realise the full value of their option will mostly prefer to sell it on, rather than exercise it immediately, sacrificing the time value. Where an American and a European option are otherwise identical having the same strike priceetc.

If it is worth more, then the difference is a guide to the likelihood of early exercise. In practice, one can calculate the Black—Scholes price of a European option that is equivalent to the American option except for the exercise dates of course. The difference between the two prices can then be used to calibrate the more complex American option model. To account for the American's higher value there must be some situations in which it is optimal to exercise the American option before the expiration date.

This can arise in several ways, such as:. There are other, more unusual exercise styles in which the payoff value remains the same as a standard option as in the classic American and European options above but where early exercise occurs differently:. These options can be exercised either European style or American style; they differ from the plain vanilla option only in the calculation of their payoff value:. The following " exotic options " are still options, but have payoffs calculated quite differently from those above.

Although these instruments are far more unusual they can also vary in exercise style at least theoretically between European and American:. From Wikipedia, the free encyclopedia.

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Below we define a set of various spread options that asian spread option pricing models and computation how one can combine vanilla options into more complex payoffs.

Then we construct example analytical, binomial, and Monte Carlo test models that will be used when valuing the various vanilla and spread options at the defined start date. Next let's define a function for calculating the payoff asian spread option pricing models and computation of each spread at expiry over a range of asset prices. This function assumes that the provided date is the expiry date of all components within the contract c. Next we will create a set of vanilla call and put options at separate strikes that will be used for construction of the different spread options.

Unlike a zero coupon bond, a coupon bearing bond pays the holder a specified amount at regular intervals up to the maturity date asian spread option pricing models and computation the bond. These coupon payments, and the interest that can accumulate on those payments must be taken into account when pricing the coupon bond.

The structuring of a coupon bond with Miletus provides an example of how to construct a product with multiple observation dates. First let's show an example of the creation of a zero coupon bond. For this type of bond a payment of the par amount occurs only on the maturity date. Next let's define a function for our coupon bearing bond. The definition of multiple coupon payments and the final par payment involves a nested set of Both types, with each individual payment constructed from a When of an date observation and a payment contract.

To construct an individual coupon bond, we first define necessary parameters for the par, coupon, number of periods, start date and expiry date. Finally we can value this bond by constructing a yield curve and associated yield model and operating on the coupon bond contract with the defined yield model.

Asian options are structures whose payoff depends on the average price of an underlying security over a specific period of time, not just the price of the underlying at maturity.

To price an Asian option, we will make use of a Monte Carlo pricing model, as well as a contract **asian spread option pricing models and computation** considers a MovingAveragePrice. We can view the underlying simulation paths used for our Geometric Brownian Motion Model using Gadfly as follows:.

Next we construct a fixed strike Asian Call option. Note the MovingAveragePrice embedded in the definition. Buy a put and a call at the same strike function straddle expiry:: Buy one call and two puts at the same strike function strip expiry:: Buy one put and two calls at the same strike function strap expiry:: Buy a put at the low strike and a call at the high strike function strangle expiry:: Month 1