Asian Option
Asian Option
Access the Mathema Options Pricing System, which supports foreign exchange options and structured product pricing and valuation!
The Notice of the State Administration of Foreign Exchange on Measures to Support Foreign Exchange Risk Management of Market Entities (Draft for Comments) issued on November 26, 2021 stipulates that "banks may add RMB to foreign exchange ordinary American options, Asian options, and their combination products to the customer's foreign exchange market. Banks that already have the qualifications for customer option business may carry out the above-mentioned new products on their own.
Taking this opportunity, let me briefly introduce foreign exchange Asian options.
Forex Asian Options
Asian style options (also known as Asian currency options) are a special type of option contract, namely average exchange rate options, whose returns depend on the average exchange rate between domestic and foreign currencies over a certain period of time. Unlike European or American style options, whose returns depend on the foreign exchange spot price on the exercise date.
Asian options are generally applicable to the following scenarios:
- Pay attention to the average exchange rate over a period of time.
- Avoid the possibility of a single price being manipulated at a certain point in time.
- Avoid high fluctuations.
- Due to the low liquidity market with light trading, pricing has become inefficient.
The advantages of Asian options
One advantage of Asian options is that they reduce the risk of market manipulation of the underlying instrument at maturity, as the final exercise result is determined by the average price over a period of time. Options provide market participants with many opportunities to limit risk and increase profits. By utilizing forex Asian options, companies can protect themselves from adverse exchange rate fluctuations.
In addition, due to the use of the average foreign exchange rate, Asian options reduce the inherent volatility of options, so the price of Asian options is usually relatively lower than that of European or American options. Taking a one month average option as an example, the price of Asian options is about 60% of that of European options.
The Structure of Asian Options
According to the average price object, Asian options are divided into: average strike price or average rate.
- Average strike: The strike price is determined based on the average price over a set observation period, also known as a floating strike.
- Average rate: The observed price is determined by the average price during the observation period, and this type is also known as a fixed strike price.
The calculation method of average price can be divided into arithmetic average price or geometric average price.
- Arithmetic mean: Observe the arithmetic mean of prices.
- Geometric Mean: Observing the geometric mean of prices.
The observation period of the average price is determined based on the set start date (average start), end date (average end, usually the contract expiration time), and observation period (frequency). The observation period can be daily, weekly, monthly, quarterly, etc.
Here is an example of an Asian option contract:
| Field Name | English Name | Value |
|---|---|---|
| 交易日期 | Trade Date | 2012/10/10 |
| 交易货币对 | Pair | USD/CNY |
| 交易方向 | Buy/Sell | Sell |
| 看涨/看跌 | Call/Put | Call |
| 交割方式 | Delivery Type | Cash |
| 平均价类型 | Average Type | Fixing Rate |
| 平均价计算方式 | Arithmetic | Arithmetic mean |
| 即期汇率 | Spot | 6.5500 |
| 行权汇率 | Strike | 6.8023 |
| 本金 | Notional | 100,000 USD |
| 平均价开始日期 | Average Start | 2022/10/8 |
| 平均价周期 | Fixing Frequency | monthly |
| 期权费 | Premium | 0 |
| 到期日 | Expiry Date | 2023/10/10 |
| 交割日 | Delivery Date | 2023/10/12 |
- 观察周期
| Fixing Date | Fixing Rate |
|---|---|
| 2022-10-11 | |
| 2022-11-14 | |
| 2022-12-12 | |
| 2023-01-11 | |
| 2023-02-13 | |
| 2023-03-13 | |
| 2023-04-11 | |
| 2023-05-11 | |
| 2023-06-12 | |
| 2023-07-11 | |
| 2023-08-11 | |
| 2023-09-11 | |
| 2023-10-10 |
Interpretation of Asian Market Options by the Foreign Exchange Trading Center
The settlement price or exercise price of an option depends on the average observed value during a certain period of time within its validity period, and is divided into average rate options and average strike price options. The institution selects the type of Asian option, uses the reference exchange rate, calculation frequency, and calculation range for exchange rate calculation, and determines whether to exercise the option by comparing the strike price with the spot exchange rate price on the expiration date. If the institution chooses the average strike price option, the strike price is calculated based on the average price range, frequency, and reference exchange rate selected by the institution. The exercise rules on the expiration date are the same as those for ordinary European options; If the institution chooses the average price option, the expiration date spot price will be calculated based on the average price range, frequency, and reference exchange rate selected by the institution. The exercise rules on the expiration date are the same as those for ordinary European options.
There are two methods for calculating the average: arithmetic mean and geometric mean.
The reference exchange rate can be based on the benchmark price published by the trading center. At present, currency pairs for foreign exchange settlement and sale support the selection of a middle rate, and the RMB/USD exchange rate also supports the selection of benchmark prices at 10:00, 11:00, 14:00, and 15:00 as reference exchange rates. The foreign currency pair (G10) market supports selecting benchmark prices at 10:00, 11:00, 14:00, 15:00, and 16:00 as reference exchange rates.
『Note』
Sampling date calculation method:
If the calculation frequency is daily, take each trading day within the range of [start date, end date].
If the calculation frequency is weekly, take every Friday within the range of [start date, end date]. If Friday is a non trading day, it will be postponed to the next trading day. If the calculated sampling date exceeds the range of [start date, end date], it will be removed.
3. If the calculation frequency is monthly, take the last trading day of each month within the range of [start date, end date].
If there is a temporary holiday adjustment, and the original calculation day is adjusted to a holiday or non trading day, the calculation day will be postponed to the next trading day.
Excerpt: P53， [Product Guide V4.2. pdf of China Foreign Exchange Trading Center]（ https://iftp.chinamoney.com.cn/chinese/jygz/20231102/2735312.html ）
Please note that this is different from international Schedule conventions, which may have an impact on the pricing and valuation of Asian options