Skip to content
All library documents

Liquid Asian Options in Commodity and Interest Rate Markets

Article Quant Q&A · Author: Richard Hardy
Read the original

Summary

This discussion identifies markets where Asian options may trade actively and where historical prices might be available. It points to options on federal funds futures: because the futures settle against the average effective federal funds rate over a contract month, options on them have Asian-style exposure. CME is identified as the venue, though the discussion does not confirm the availability of historical option prices.

The answers also describe Asian options as common in commodities delivered continuously over time, including electric power and natural gas. Metal smelters may use them to hedge input costs that accrue daily, and pipeline-delivered oil or products may also suit averaging. By contrast, ship or barge delivery can create incentives to time official arrival around settlement cutoffs. These are market observations rather than measured liquidity comparisons; the document gives no trading volumes or data-access details.

Key ideas

  • Options on federal funds futures have Asian-style exposure because the underlying futures settle on an average rate over the contract month.
  • CME is suggested as a venue for these options, but historical price data availability is not confirmed.
  • Asian options may fit commodities delivered continuously, such as power and natural gas.
  • Averaging can reflect industrial users’ costs when inputs are consumed throughout operations.
  • Arrival cutoffs for shipped commodities can create settlement timing incentives.

Tags

OptionsFuturesCommoditiesFixed incomeMarket microstructure
Full text
# What are some liquid Asian options markets?


# What are some liquid Asian options markets?












I have some ideas about Asian options that I would like to test with historical market data. I am therefore looking for some fairly liquid Asian options markets, preferably ones with publicly available price data. Question: Does anyone know any examples of such markets and sources of corresponding price data?

Background: I have no prior experience with Asian options, so I looked up some 10-15 textbooks (with the 3 "mildly successful" hits listed below) and a few papers but did not get very far. I hope someone here will have a suggestion or two.

- Fabozzi et al. (eds) "The Handbook of Commodity Investing" (2008) pp. 590-591 (p. 604-605) says Asian options are available and popular for oil.

- Geman "Agricultural Finance" (2015) pp. 95-100 says Asian options are particularly appropriate for commodity markets and, unsurprisingly, represent a large fraction of the options traded in these markets.

- Geman "Risk Management in Commodity Markets" (2009) pp. 159 gives an example of Asian options at IMAREX (a freight market).

I also found that London Metal Exchanged offers Asian options.

## Answer by piterbarg (score 4)

https://quant.stackexchange.com/a/63062

I would guess options on FedFund futures are the world's most liquid Asian options. Here is the spec for FedFund futures: https://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund_contract_specifications.html you can see they settle into

> arithmetic average of daily effective federal funds rates during contract month

So the FefFund future options are then, in effect, Asian options on the effective fed funds rate. These are traded on CME where, I guess, you can find prices and other relevant info (although I have not looked for historical data there)

## Answer by kurtosis (score 2)

https://quant.stackexchange.com/a/63890

Asian options are the most liquid markets for options on commodities which are delivered over time such as electric power and natural gas. Some metal smelters also use Asian options since their plant runs every day and so their costs (power, ore) are well-approximated by an average over time. (Hence why the LME has some Asian options.) Asian options may also be used for crude oil or products which are delivered via pipeline.

This is often not true, however, for crude oil and products delivered by barge or ship (a large part of the market). In that case, the settlement price is often a function (usually an average) of the price for a few days prior... which leads to gaming as to whether the ship enters harbor and officially arrives before or after midnight.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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