Asian Options

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Seminar Summer Term 2012

Practical Financial Engineering

Ahmed Mahmoud
Harris Rahim
Hudson Joel

A Seminar Thesis Submitted to the Faculty of Finance and Economics, University of Ulm in Partial Fulfillment of the Requirement for a Masters Degree in
Master of Science

University of Ulm

Ulm, Germany
5th July 2012

We hereby confirm that the seminar thesis is our own work and that we have used only the stated literature and other means.

Ahmed Mahmoud


Harris Rahim

_______________ Hudson Joel

Division of the Seminar Thesis

Division of the seminar thesis is done as follows:
Ahmed Mahmoud has done chapter 1 and 2, Harris Rahim has done chapter 3, Hudson Joel has done chapter 4.


Chapter 1- Introduction 5 1.1 The payoff 6 Chapter 2: Partial Differential Equations 8 2.1 The Black Scholes Model 8 2.2 Reduction to a One-Dimensional Equation 9 Chapter 3- A valuation model for an Average Value (AV) option 11 Chapter 4- Program 15 4.1 Geometric average price call 15 4.2 Geometric average price put 17 References 20

Chapter 1- Introduction

Asian option is one type of options where the payoff is determined by the average underlying stock price over a period of time. This differs from the usual European and American options where the payoff depends on the price of the underlying instrument at exercise. Therefore, the Asian options are one of the forms of exotic options.
Asian options have a lower volatility and hence rendering them cheaper relative to their European counterparts. They were originally used in 1987 when Banker's Trust Tokyo office used them for pricing average options on crude oil contracts; and hence the name "Asian" option.
The popularity of these derivatives arises from their usefulness in hedging, and other…...

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