Business options in Asia
- The Black and Scholes model
- Types of options
- Exotic options
- Barrier options
- Asian options
- Case of Asian option of selling European-style arithmetic average
- Directional expectations
- Appendix: Summary
The growth of financial markets has led to the evolution of sophisticated and complex financial instruments. The complexity of these instruments continues to grow to meet the immediate needs of companies that look up to hedge against risks. These financial innovations, known as exotic options, are characterized by higher payments and are more complicated than the standard options. These options differ from a standard vanilla option. A vanilla option is an option contract with no special characteristics. It is a call and has a standard expiry date and strike price. The contract contains no unusual provisions.
After the publication of the work of Black and Scholes, a number of European and American options have been traded in the financial markets.
[...] In addition, there are partial barrier options activating (or deactivating) where one level must be reached during the audit period of the barrier for the underlying option to appear or disappear. In case of double barrier options that are activated or deactivated and where two levels of barriers are preset and only one level was reached during the audit period, the underlying the option appears or disappears accordingly Asian options Definition An Asian option, also called option on average, is an option whose payoff (barrier) depends on an average over the underlying asset over a predefined period. [...]
[...] Average weighted arithmetic: In calculating the arithmetic mean, the importance of each observation is uniform. However, it is possible to change the weight of each observation. Thus, the arithmetic mean is replaced by a weighted arithmetic average. This type of average can be particularly useful in cases where the quantity of goods or financial assets traded by the firm varies over time. Geometric mean: This type of average is however more interesting in an academic setting for the financial market. [...]