medium · FRM Part 1 Financial Markets and Products
An Asian call option is struck at 100 and settles based on the arithmetic average of five monthly spot prices:95, $98,102, 105, and110.
How does its payoff compare to an otherwise identical vanilla European call, and why?
- The Asian payoff of 10 equals the vanilla payoff because both fully capture the same terminal upward price move.
- The Asian payoff (2) is lower than the vanilla payoff (10) because averaging reduces the impact of late-term price spikes.
- The Asian payoff is 0 because the running average must stay above the strike for the whole five-month averaging period.
- The Asian payoff of 5 is higher than the vanilla payoff because averaging still benefits from the underlying's steady upward trend.
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