A path-dependent option that uses average prices over the whole period of the option’s life or part of it, rather than the underlying’s price at expiration date, in order to calculate the final payout. Examples of options whose payout calculation depends on the average price method include Asian options (average options), or average price options and average rate options, and so on. For instance, the payout of an average rate option, at expiration, is determined by figuring out the difference between the strike price and the average spot rates observed over a specific period of time during the option’s life. As such, the payout of an average rate call option is either the positive difference between the average rate and the strike price, or zero (if that difference is negative).
March 2, 2024
