An Introduction to Exotic Option Pricing

Chapter 9

Asian Options

9.1 Introduction

Asian options were first introduced in the 1990s decade,partly to discourage the possibility of market manipulation. For example, a call option which is currently itm, just before expiry, could be forced otm at expiry, by a sudden down selling of the underlying asset. This would be virtually impossible to do for a fixed strike Asian option. There was an additional benefit, in that Asian options were often much cheaper than corresponding standard options, thus providing a cost effective method of risk management.

Similar to lookbacks, Asian options are path dependent and the standard ones come in floating and fixed strike versions. A floating strike Asian call option is similar to a European call, except ...