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Options - Average Rate Options

Average rate or Asian options are options whose payoff depends on average prices over a specified period (usually the life of the option). This course will cover the basic features of average rate options (AROs). It also describes the methods used to price an ARO and examines the sources of pricing sensitivity.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Identify the characteristics of average rate options

    Describe how average rate options are priced and valued

    Identify the sources of pricing sensitivity

  • COURSE OUTLINE

    Topic 1: Average Rate Option Basics

    Types of Average Rate Options

    Cost Comparisons

    Topic 2: Pricing Considerations for Average Rate Options

    Path Dependency

    Average Rate Call and Put Valuation

    Pricing Methods

    Monte Carlo Simulation

    Monte Carlo Simulation Paths

    Pricing Using Monte Carlo

    Error Factor

    Variance Reduction Techniques

    Analytic Pricing Methods

    Intuition behind Levy’s Method

    Topic 3: Average Rate Option Sensitivities

    ARO Sensitivities versus Standard Option Sensitivities

    Standard Option versus ARO

    Deltas for ARO

    Sensitivities Over Time

    Current Spot Versus Average Spot

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    60 Minutes

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