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.
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.
Within an average rate option, the spot at expiry within a standard vanilla payoff is replaced with an average of fixings:
where is an average of spot fixings.
The following are example average rate option contract details: