An Exotic Financial Derivative Instrument
The Asian style option (or average style option) is a form of security
with a payoff depending on the average of some index price level over a range of dates. A variety of stories exist regarding the name; some maintain the first OTC
trades in Asian options ocurred in (surprise) Asia
in the 1980s. Asian style options are an exotic form of European style option
, with a single possible exercise date. A study by CIBC World Markets
determined that Asian style options are the most commonly traded form of Exotic Option
Why might a person want an Asian option? For one, a European style option might have wide fluctuations of price for the underlying towards maturity. Averaging the underlying price level over a series of dates "smooths out" the fluctuations, and makes the option payout less susceptible to manipulation. Secondly, and more importantly, this feature makes Asian style options cheaper than European style options.
Asian style options cannot be priced using the theoretical framework of Fisher Black
and Myron Scholes
. A variety of analytical approximations exist, of which the most accurate is the Levy moment-matching technique.