Hedging with flexible Asian options
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Hedging with flexible Asian options book
Asian options, or options based on the average underlying asset prices, are one special kind of path-dependent options. Generally speaking, an Asian option is an option whose payoff depends on some average price of the underlying asset during a pre-specified period within the option’s life and at a pre-specified observation frequency. Prices of flexible Asian options depend on weights assigned to various observations. This chapter shows that the flexibility of traditional sensitivities and higher sensitivities characteristic of the flexible Asian options and compare them with the standard Asian options and plain vanilla options. The starting point of the flexible Asian options is the weight function for each observation. The effective variance of the average is always smaller than that of the spot price at settlement. Therefore, prices of the flexible Asian options are generally smaller than for the corresponding plain vanilla options using the Black–Scholes formula.