How Monitoring Frequency May Affect Asian Option Prices

Summary

The document asks how the number of observations used to calculate an underlying asset’s average affects the price of an Asian option. It contrasts averaging over all available prices with selecting more widely spaced observations, which reduces the number of monitoring points. The author reports a simple Monte Carlo observation: in their simulations, the option price fell as the number of monitoring points was reduced, and asks for the conceptual reason.

No explanation, pricing formula, or simulation setup is included, so the reported direction should be read as an observation to investigate rather than a general result. The effect can depend on the option’s payoff definition, whether the average is arithmetic or geometric, the sampling schedule, and the underlying price process. The document does not state those details or distinguish fixed-strike from floating-strike contracts. It therefore raises a useful pricing question but does not establish that fewer monitoring dates always lower an Asian option’s value.

Key ideas

• Asian option payoffs depend on an average of underlying prices over a monitoring schedule.
• The author observes a lower simulated price when using fewer monitoring points.
• The document asks why monitoring frequency may affect value but does not provide an explanation.
• The observation cannot be generalized without details about payoff type, averaging method, and price process.

Tags

# Effect of number of monitoring points on Asian Option Price


# Effect of number of monitoring points on Asian Option Price












I want to understand conceptually the expected effect of the number of monitoring points used during the average calculation on Asian options pricing and the reason of such effect.

Asian Options depend on the average of the underlying stock price. The average can be computed with all the available stock prices, or one could choose further spaced points effectively decreasing the number of monitoring points.

I have performed some simple MC simulations and if I didn't mess up I see that the price of the Asian option decreases as I decrease the number of monitoring points. Why is that?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.