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An Asian option or average value average price option definition is a special type of option contract. For Asian options the payoff is determined by the average underlying price over some pre-set period of time. This is different from the case of the usual European option and American optionwhere the payoff of the option contract depends on the price of the underlying instrument at exercise; Asian options are thus one of the basic forms of exotic options. In general they do not differ in definition, only in how the pay-off is calculated.
Because of the averaging feature, Asian options reduce the volatility inherent in the option; therefore, Average price option definition options are typically cheaper than European or American options.
In the s Mark Standish was with the London-based Bankers Trust working on fixed income derivatives and proprietary arbitrage trading. David Spaughton worked as systems analyst in the financial markets with Bankers Trust since when the Average price option definition of England first gave licences for banks to do foreign exchange options in the London market.
In Standish and Spaughton were in Tokyo on business when "they developed the first commercially used pricing formula for options linked to the average price of crude oil. Conventionally, this means an arithmetic average. In the continuous case, this is obtained by.
There also exist Asian options with geometric average ; in the continuous case, this is given by. A discussion of the problem of pricing Asian options with Monte Carlo methods is given in a paper by Kemna and Vorst. In the path integral approach to option pricing the problem for geometric average can be solved via the Effective Classical potential  of Feynman and Kleinert. Rogers and Shi solve the pricing problem with a PDE approach. Variance Gamma model can be efficiently implemented when pricing Asian style options.
Then using the Bondesson series representation for generating the variance gamma process shows to increase performance when pricing this type of option. From Wikipedia, the free encyclopedia. Financial Accounting Standards Board. Managing Energy Price Risk. Paul Wilmott on Quantitative Finance. Because some of them are from Japan. An Asian option also called an average option average price option definition an option whose payoff is linked to the average value of the underlier on a specific set of dates average price option definition the life of the option.