Explanation:
Asian options are financial derivatives whose payoff is determined by the average price of the underlying asset over a specified period. Unlike European or American options, which derive their value from the asset’s price at expiration, Asian options provide exposure to the average price. This feature makes them less susceptible to price manipulation near expiration and can be advantageous in markets prone to volatility.
A is incorrect. Barrier options have payoffs contingent on the underlying asset's price reaching a predetermined level (barrier).
C is incorrect. Lookback options provide a payoff based on the maximum or minimum price of the underlying asset over a specific period.
D is incorrect. Compound options are options on options.
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Q.5 A quantitative analyst is developing a model to price exotic options. The analyst is particularly interested in a specific type of path-dependent option that pays off based on the arithmetic average of the underlying asset's price over the option's life. The option discussed is most likely:
A
a barrier option.
B
an Asian option.
C
a lookback option.
D
A compound option.