This is an option in which payoff is based on an average rate. There are 2 types:
1. Average strike option has its strike based on average of the observations during the life of the option.
2. Average rate option has a fixed strike and its payoff is based on average rate of the underlying over the life of the option.
Averaging reduces volatility, so asian options are cheaper. It's very popular with energy/commodity business and importers as they tend to make purchases over a period of time rather than on a single date and so asian options offer a better hedge.
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