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FX Derivatives Trader School by Giles Jewitt

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Chapter 29Asian Options

The key characteristic of Asian options is that some element of their payoff is based on an average. The most common Asian option variations have a single average that is used in place of either the spot or the strike at maturity within a vanilla payoff. The average is either calculated from spot fixings that occur regularly between the horizon and expiry date as shown in Exhibit 29.1, or the fixings can be over a subsection of the period as shown in Exhibit 29.2.

c29ex001

Exhibit 29.1 Example single average fixing schedule A

c29ex002

Exhibit 29.2 Example single average fixing schedule B

Fixings can be taken at different sample frequencies, for example, daily, weekly, or monthly. Plus note that Asian options are always cash-settled at maturity.

Average Rate Options

Within an average rate option, the spot at expiry within a standard vanilla payoff is replaced with an average of fixings:

equation

where c29-math-0002 is an average of spot fixings.

The following are example average rate option contract details:

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