An Asian option
is also known as the "average value option
" and is a unique form of option contract where the payoff is determined by averaging the price over some pre-determined amount of time. Normally, the "European" or "American" option involves a payoff based solely on the the price at the time of exercise. There is a particular type of Asian option strategy called the "Asian Strangle". The Asian Strangle
is a particular trading strategy where, regardless of the direction of price adjustments in the underlying security, the holder of the option derivative can profit on movement alone.
Q&A About Asian Strangle and Exotic Options Derivatives
What does an Asian option depend on?
The average traded price of the underlying instrument during the life of the contract.
How can you use binomial trees to value all varieties of options?
Using accelerated simulation.
How do you value all varieties of options using binomial trees?
By using accelerated simulation.
Where did the term "exotic option" originate from?
The term originated either due to use of international terms such as Asian option or due to reference in horse racing betting on 21 Kentucky Derby wagers considered by some as being "exotic".
What does the term "exotic" refer to in the context of exotic options?
The term "exotic" refers to non-standard underlying instrument, developed for a particular client or for a particular market.
What is an Asian option?
An Asian option pays the owner if a certain price level is hit.
Why did only one previous attempt investigate application of convergence for pricing Asian options?
Because this was the first time anyone had tried to apply it to pricing Asian options.
How are exotic options different from vanilla options?
Exotic options have several triggers relating to determination of payoff.
Are all types of exotic options traded over the counter (OTC)?
Yes, all types of exotic options are traded OTC.
What is an exotic option?
An exotic option is a type of option that has features making it more complex than commonly traded vanilla options.