easy · Quantitative Finance
Why is an arithmetic Asian option generally cheaper than a standard European vanilla option on the same underlying?
- The averaging process reduces the effective volatility of the payoff variable.
- It is less sensitive to the risk-free rate than a vanilla contract.
- It can only be exercised at a single fixed point in time, unlike averaging.
- The dividend yield is subtracted from the computed average price before payoff is set.
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