Handbook of multi-commodity markets and products: structuring, trading and risk management

In this chapter, we describe and compare alternative procedures for pricing Asian options. Asian options are derivatives contracts written on an average price. More precisely, prices of an underlying security (or index) are recorded on a set of dates during the lifetime of the contract. At the option's maturity, a pay-off is computed as a deterministic function of an average of these prices. As reported by Falloon and Turner (1999), the first contract linked to an average price was traded in 1987 by Bankers & Trust in Tokyo, hence the attribute ``Asian''. Asian options are quite popular among commodity derivative traders and risk managers.