Asian barrier option

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.

World of Barrier Options - KIKO Structures

These options allow the buyer to purchase or sell the underlying asset at the average price instead of the spot price. Asian options are also known as average options. Asian barrier option options have relatively low volatility due to the averaging mechanism.

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They are used by traders who are exposed to the underlying asset over some time, such as consumers and suppliers of commoditiesetc. They are constructed by tweaking ordinary options in minor ways. In general but not alwaysAsian options are less expensive than their standard counterparts, as the volatility of the average price is less than the volatility of the spot price. Typical uses include: When a business is concerned about the average exchange rate over time.

A simple arbitrage argument—simultaneously holding the "in" and the "out" option guarantees that exactly one of the two will pay off identically to a standard European option while the other will be worthless. The argument only works for European options without rebate. Barrier events[ edit ] A barrier event occurs when the underlying crosses the barrier level. While it seems straightforward to define a barrier event as "underlying trades at or above a given level," in reality it's not so simple.

When a single price at a point in time might be subject to manipulation. When the market for the underlying asset is highly volatile.

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When pricing becomes inefficient due to thinly traded markets low liquidity markets. This type of option contract is attractive because it tends to cost less than regular American options.

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Asian Option Example For an Asian call option using arithmetic averaging and asian barrier option day period for sampling the data.

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The arithmetic average mean is The profit is the average minus the strike price As with standard options, if the average price is below the strike pricethe loss is limited to the premium paid for the call options. Compare Accounts.

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