When do companies opt for Asian options, and why?

Asian options are exotic options that are becoming increasingly popular with companies. Asian options differ from traditional options in that they are settled on the price of the underlying asset at expiration and the average price of the asset during the option’s lifetime. It makes them well-suited for assets subject to large swings in price, such as commodities.

There are two main types of Asian options: discrete and continuous. Discrete Asian options settle based on the average price of the asset over a set period, while endless Asian options settle based on the asset’s average price over the entire life of the option; check here to find out more.

When do companies use Asian options?

Companies use Asian options when they want to hedge against price fluctuations or speculate on the price of an asset. Asian options are also used when companies want to access liquidity, margin, leverage, or credit.

Why do companies use Asian options?

Companies use Asian options because they are less risky than traditional options and more predictable. They can also be used in hedging and speculation. Additionally, Asian options provide access to liquidity, margin, leverage, and credit.

Advantages of Asian options

Higher return

The main advantage of Asian options is that they can provide a higher return than traditional options. It is because the payout is based on the average price of the asset rather than just the price at expiration. It means that Asian options are less sensitive to changes in the underlying asset’s price near expiration. 

Less risky

Another advantage of Asian options is that they are generally less risky than traditional options. It is because the payout is based on the average price of the asset rather than just the price at expiration. It means that Asian options are less sensitive to changes in the underlying asset’s price near expiration.

More predictable

Asian options are also more predictable than traditional options. It is because the payout is based on the average price of the asset rather than just the price at expiration. It means that investors can better know their return before they invest.

It can be used in hedging.

Asian options can also be used in hedging. Hedging is an investment strategy that involves taking offsetting positions in different assets to minimize risk. For example, a company might hedge its exposure to fluctuating commodity prices by buying an Asian option on a commodity futures contract.

It can be used in speculation.

Asian options can also be used in speculation. Speculation is an investment strategy that involves taking a risk in the hope of making a profit. For example, an investor might buy an Asian option on a stock that they believe is undervalued.

Access to liquidity

Another advantage of Asian options is that they provide access to liquidity. Liquidity is the ability to buy or sell an asset quickly and at a fair price. Asian options are traded on exchanges, allowing investors to buy or sell them quickly and at a fair price.

Access to margin

Another advantage of Asian options is that they provide access to margin. It is the amount of money that an investor must buy an asset. For example, if an investor wants to buy a stock for $100, they might only need to put up $10 if they are using margin. It allows investors to leverage their investment and potentially make a higher return.

Access to leverage

Another advantage of Asian options is that they provide access to leverage. It’s the use of borrowed money to finance an investment. For example, if an investor wants to buy a stock for $100, they might only need to put up $10 if they are using leverage. It allows investors to make a higher return on their investment, increasing risk.

Access to credit

Another advantage of Asian options is that they provide access to credit. It’s the ability to borrow money to finance an investment. For example, if an investor wants to buy a stock for $100, they might only need to put up $10 if they use credit. It allows investors to make a higher return on their investment, increasing risk.