What are Asian Options?

Malcolm Tatum

Sometimes referred to as an average strike rate option, the Asian option is based on the idea of paying out an amount that is determined by calculating the average of the underlier. While the process for calculating Asian options is somewhat more detailed than an American-style option or the European-style option, the task is still relatively straightforward when compared to exotic options.

Businessman with a briefcase
Businessman with a briefcase

Determining the exercise price is the key to understanding how Asian options work. In order to arrive at the exercise price, the average price of the underlying security for a specified period is identified. As an example, the price activity for the security over a period of six months to a year may be charted, and the average price calculated from that data. Once the average is determined, a fixed discount is applied to that figure.

Options of this type are generally considered to be investment opportunities that tend to carry a moderate amount of risk. Because the process of determining the exercise price includes gathering data about the performance of the security over a particular period of time, it is relatively easy to determine if Asian options are a good fit for the investment goals of the investor. If the security appears to be more volatile than a conservative investor feels comfortable with, the process of calculation that goes into Asian options will make that clear, and allow the investor to seek opportunities elsewhere. At the same time, investors who specialize in high risk ventures will be able to determine that Asian options may not present the potential for the level of return he or she is seeking, and can move on to riskier investments with a potentially higher rate of return.

Asian options are a viable investment for many individual and corporate investors. Carrying what many consider to be an equitable amount of risk matched with a reasonable return, this is an option that continues to be attractive to many people who want to be a little creative with their investments while still avoiding high speculative deals.

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