What Is an Average Price Call?

M. McGee
M. McGee
Man climbing a rope
Man climbing a rope

An average price call, often called an Asian call or an Asian option, is an exotic financial instrument used in investing. Unlike most option types, the call is based on the average price of the underlying security over a set period. With most call options, the price is based on a preset value or the the underlying asset's current value at the time the option is used. An average price call is a much more stable and safe investment than other options, making this option style less expensive overall, but typically providing a lower average return.

In order to fully understand what an average price call is and how it differs from other types of options, it is necessary to understand some basic terminology. A call, or call option, is a contract that specifies that a buyer may purchase something from a seller at a specific time and for a specific price in exchange for a small fee. The value of this agreement is based largely on the value of the asset being discussed, often referred to as the underlying. Basically, the buyer pays the seller for the option to buy the underlying in the future with the hopes that market fluctuations will cause the price to become more favorable.

Vanilla options, known as American or European options, make up the vast majority of sold options. An American option lets the buyer purchase the asset at any point from the issue of the option until the option’s expiration date; a European lets buyer purchase at one specific time in the future. Exotic options make up the rest of the styles, with Asian options being one of the largest exotic styles.

An Asian option, or average price call, has an additional criterion over vanilla options. The average price call specifies a time over which the value of the underlying is monitored closely. At the end of this period, the average price is found and used as the buying price. This method often smooths out any fluctuations in the market, leaving the option’s value at a point that is representative of the underlying’s true value.

Since an average call option uses a more stable method of determining value, the investment is generally easier to value. In order to make money, the investor simply has to sell the underlying for more than the buying price and fee. This means that if an asset has an average price curve, both the buyer and seller will know the approximate return on investment before the option is sold. As a result, these options are often priced lower to account for abnormal fluctuations and an overall lower return rate.

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