Fixed price options trading strategies41 comments
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A cynical look at our financial markets and the governments that support them. 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 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:.
Posted in Derivatives , Educational. Tagged with asian option pricing , asian option. By SurlyTrader — April 9, Stay in touch with the conversation, subscribe to the RSS feed for comments on this post.
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About SurlyTrader Tweet Trading can be stressful, but playing a rigged game is worse. SurlyTrader will explore the hidden game of financial institutions and the government that supports them while providing useful tips on trading strategies, hedging and personal finance. SurlyTrader is a portfolio manager at a large financial institution who specializes in trading derivatives. Support the Blog Voluntary Donation for the Blog. Free Email Subscription Your email: Popular Posts Option Strategy: