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Pricing Asian put option

DAuwa

New Member
Thread starter #1
Hi Team BT,

I was wondering anyone could help me with answering this question, its not been taught in my course yet and we have been sent off to understand it ourselves using our own methods, I keep coming up short so figured id reach out to the greater community here. Here is the question i need assistance with:

"A treasurer is contemplating buying a three-month average price (Asian) put option on the Australian dollar with an exercise price equal to the current spot rate of the Australian dollar of AUD1 = USD0.7200. Her treasury analyst estimates that the Australian dollar will either rise or fall by 5% during each on-month period. The term structure is flat in both Australia and the US, with risk free rates of 1.5% and 0.5% p.a. respectively, continuously compounded.

a) Build a three-period binomial model to price the average price put option (calculated using the prices at the end of months 1, 2 & 3). Making sure you include a binomial tree for the exchange rate. "

Im new to this site so not sure if ive posted in the correct area - but any help would be greatly appreciated.

Thank you :D
 

Nicole Seaman

Chief Admin Officer
Staff member
Subscriber
#2
Hi Team BT,

I was wondering anyone could help me with answering this question, its not been taught in my course yet and we have been sent off to understand it ourselves using our own methods, I keep coming up short so figured id reach out to the greater community here. Here is the question i need assistance with:

"A treasurer is contemplating buying a three-month average price (Asian) put option on the Australian dollar with an exercise price equal to the current spot rate of the Australian dollar of AUD1 = USD0.7200. Her treasury analyst estimates that the Australian dollar will either rise or fall by 5% during each on-month period. The term structure is flat in both Australia and the US, with risk free rates of 1.5% and 0.5% p.a. respectively, continuously compounded.

a) Build a three-period binomial model to price the average price put option (calculated using the prices at the end of months 1, 2 & 3). Making sure you include a binomial tree for the exchange rate. "

Im new to this site so not sure if ive posted in the correct area - but any help would be greatly appreciated.

Thank you :D
Hello @DAuwa

Welcome to our forum. It is getting very close to the FRM exam (less than two weeks) so I wanted to try to point you in the right direction in case our FRM forum members do not have time to answer your question right away. We have over a decade of discussions in our forum, so using the search function may help you to find an answer. It should at least provide you with information about the concept that you are questioning, as there are many posts regarding Asian options in the forum. The search function is here: https://www.bionicturtle.com/forum/search/?type=post. I hope this helps a bit!

Nicole
 
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