Asian Options
Options whose payoff depends on an average price.
Read the contractual cash flows first.
Averaging dampens the impact of one extreme fixing and better matches gradual physical exposure.
Options whose payoff depends on an average price.
Express payoff and present value precisely.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
Make conventions part of the contract.
Contract dates, calendars, settlement, notionals and payoff currency are part of the valuation input.
Discounting and projection conventions must match the collateral and quotation framework.
The displayed payoff omits legal terms and lifecycle events unless stated otherwise.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
Locate the quote and replication instruments.
Commodity procurement, production and revenue hedging.
Map cash-flow changes into hedge risk.
Reconcile the contractual payoff before reading the COMM risk. Small date or convention changes can move cash flows before any model parameter moves.
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