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An Asian option also called average value option is a name given to a special type of option contract. The average underlying price over some pre-set period of time determines the payoff for Asian options. This is quite different from the case of the usual European option and American option, where the price of the underlying instrument at maturity determines the payoff of the option contract.

One advantage that is offered by the Asian options is that the risk of market manipulation of the underlying instrument at maturity is reduced by them.

Payout of Asian Call Options with Arithmetic Average

Below I have described the payout of some Asian call options.

For the continuous case we have the payout

where

• time to maturity is denoted by T ,
• the price is denoted by S and,
• the strike price is denoted by K.

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There are various methods (models) of evaluation that are available in order to value warrants theoretically, in these models the Black-Scholes evaluation model is also included. However, it is important for the investors to have some understanding about the various influences on warrant prices.

Components of Market Value of Warrant

We can divide the market value of a warrant into two components:

• Intrinsic value
• Time value

Intrinsic Value

Intrinsic value is simply the difference between the exercise (strike) price and the underlying stock price. Warrants are also known as in-the-money or out-of-the-money, but that depends on where the current asset price is in relation to the warrant’s exercise price.

Thus, for example, for call warrants, the warrant has no intrinsic value (only time value – to be explained shortly), if the stock price is below the strike price. The warrant has intrinsic value and is said to be in-the-money if the stock price is above the strike.

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In this article I am explaining you the call option by giving you an example.

Buy a Call:

It is expected by the buyer that the price may go above his chosen ‘strike price’. A premium is being paid by him that will never be refunded, and he possess the right to exercise the option at the strike price, what it means is that he can choose to buy the stock at the strike price. If the price goes up enough as anticipated by the buyer then the buyer pays the strike price to actually purchase the stock. After purchasing, he can then choose to either hold the stock, or sell it to realize his profit.

Write a Call:

The premium is received by the writer. If it is decided by the buyer that he will exercise the option, then the writer has the obligation to sell the stock at the strike price. If the buyer does not exercise the option, then the writer still gains profits in the amount of the premium.

• ‘Trader A’ (Call Buyer) have purchased a Call contract in order to buy 100 shares of XYZ Corp from ‘Trader B’ (Call Writer) at $50_/share. The current price is $45_/share, and premium of $5_/share is being paid by ‘Trader A’ pays. If right before expiration the share price of XYZ stock rises to $60_/share , then ‘Trader A’ is now able to exercise the call by buying 100 shares for $5,000 from ‘Trader B’ and sell them at $6,000 in the stock market.