Evaluating the Use of Double Asian Options in Volatile Markets

Abstract

In turbulent and volatile markets options can be a preferred asset class for protection against adverse market movements. When volatility increases and markets become sparsely traded, it is not always effective to hedge adverse market movements using any option. Options, where the underlying is based on the average prices (syn. Asian options) was argued to be a reasonably good instrument in hedging sparsely traded markets. In this paper, double Asian options in volatile markets is evaluated. The double Asian option payoff is shown to be favourable over that of European and single Asian options, especially in volatile and trending markets. The double Asian option pricing can be hurdle in the effective evaluation. This paper gives a note on the consistent pricing of double Asian options, and consequently the effective use of these options in volatile markets.

Keywords: volatile markets, double Asians, average option, financial instrument

JEL Classification: C52, D40, D53, G12, G23