Business and Personal Finance Dictionary

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• ASIAN OPTION
  
  Definition: An Average Price Option (q.v.). Example: Some banks offer their retail customers an equity-linked CD that repays principal, plus a form of "average return" on the S&P 500 that amounts to an Average Price Call Option. Application: Some hedgers use an Asian Option as a one-stop way to hedge the price risk of regular purchase or sale of a constant amount of a currency or commodity. Pricing: One can ordinarily price an Average Price Option satisfactorily by using an adjusted volatility and dividend yield in the Black-Scholes-Merton pricing model. If the underlying source of risk is an exchange rate, the price of gold or silver, a share price, or an equity index, then the "square root of three" rule for the volatility may apply. For underlying oil price risk that rule may not work so well. Risk Management: With underlying currency, precious metal, or equity risk, one can ordinarily delta hedge an Asian Option with a single position in the underlying. With underlying oil risk and averaging over a long period, delta hedging an Asian Option may require hedging in oil futures contracts with several different delivery dates. Comment: Rarely, the expression, Asian Option, may indicate an Average Strike Option (q.v.).
  
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