“Asian Option”

definition

Asian options, also known as average value options, are a type of option contract whose payoff conditions are determined by the average price of the underlying asset during a predefined period.

The payoff conditions make Asian options different from European and American options, whose payoff is defined by the value of the underlying asset at maturity.

Asian options offer a series of advantages against regular options. The averaging feature of Asian options makes these instruments more efficient at mitigating any volatility in the underlying asset’s value and less likely to be manipulated at maturity. Besides, their price tends to be lower than that of European and American options.

However, businesses aiming to protect themselves from foreign currency volatility have similar alternatives, like flexible forwards or particularly Dynamic Hedging which, unlike Asian options, guarantees an exchange rate throughout the duration of the contract.