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The average of the underlying is calculated by taking the underlying on Asian option is specific series of dates or fixings. When determining the fixings, you can also edit the weighting assigned to each date.

By James Chen Updated Mar 8, An Asian option is an option type where the payoff depends on the average price of the underlying asset over a certain period of time as opposed to standard options American and European where the payoff depends on the price of the underlying asset at a specific point in time maturity.

By default, indicators in options dates chosen carry the same weight, that is, 1.

If the average rate is better than the strike, the option is in the money and it is cash settled. That is, the settlement is made in cash as opposed to physical delivery of the underlying asset.

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The underlying asset for an Asian option is a swap; for an Asian strip it is a swap strip. Why enter into an Asian option? There are a number of reasons why you would want to enter into an Asian option, as follows: Asian options are extremely important in the commodities markets, offering advantages to both the consumer buyer and the producer.

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For example, many consumers are interested in hedging average costs as their supply contracts are based on average purchase prices.

The producers are often interested in meeting budget targets that are based on average prices over the planning period. For both parties, Asian options fit their risk profiles and allow them to achieve their goals at reduced costs, because these contracts are typically less expensive than the corresponding European options.

The first of these is known as the average rate option. The value of this kind of Asian option is determined by the application of a formula which assesses the difference between the average value of the asset and a fixed strike price. These options are cash settled, meaning that the payout which has been calculated is paid in cash to the contract holder on expiration. The other form of average value option is called an average strike option. This type of exotic option is actually structured halving bitcoin like a vanilla option, with the difference being that its strike price is calculated as the average value of the underlying asset over the duration of the contract.

Asian options are generally less expensive than the corresponding European options. Because the Asian option is based on an average price, the 'implied volatility' of an average price is less than the volatility of the underlying prices used in the calculation of the average.

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Because of this relationship, an Asian option at inception is much like a European option with lower volatility. This makes the Asian option less expensive than its corresponding European option, since a vanilla option's premium increases with increasing volatility.

In addition to the lower cost, another advantage of an Asian option is that its payoff is less sensitive to extreme market conditions that may prevail on the expiration day due to random shocks or outright manipulation.

From the point of view of the option writer, Asian options are preferred products because they are easier to hedge.

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Asian options with long averaging periods do not have the high gamma Asian option is that characterizes European options near expiry. After the Asian option enters its averaging period and the average begins to set, the gamma risk of the option decreases and approaches zero near the end of averaging for options with reasonably long averaging periods.

Overview The payoff for an average price Asian option is the difference between the strike price and the average price of the underlying instrument over a certain time period.