Average Option Pricing in Volatile Market
8 Pages Posted: 18 Sep 2011
Date Written: September 16, 2011
Abstract
Financial markets exhibit high levels of volatility. Volatile markets are usually associated with high risks and uncertain investment returns. Financial institutions therefore, usually opt to hedge their investment portfolios against the high volatility using a suitable hedging structure. One particular volatility hedge, involves taking a position in an average option. However, for the hedge to be effective in practice, the price of this option must be determined. In this paper we present a method of pricing an average option that is quick and reliable especially in volatile markets.
Keywords: average, option, pricing, volatility, markets
JEL Classification: G10, G12, G13
Suggested Citation: Suggested Citation