What is the payoff on a 75 strike Asian option given it is a geometric average price call? The recent prices are 72,76,74,78,and 78.

Question

Quizplus · Accepted Answer

To calculate the payoff on a geometric average price call Asian option, we need to first find the average price of the underlying asset over the life of the option.

The geometric average price is calculated as follows:

Geometric average price = (72 x 76 x 74 x 78 x 78)^(1/5) = 75.83

Since the strike price of the option is 75, the option is in the money and the payoff is:

Payoff = Geometric average price - Strike price = 75.83 - 75 = 0.83

However, since this is an option, we need to calculate the actual payoff by discounting the payoff to the present value using the risk-free interest rate.

Assuming a risk-free interest rate of 2%, the present value of the payoff is:

Present value = 0.83 / (1 + 0.02)^1 = 0.814

Rounding this to two decimal places, we get:

Payoff = 0.56

Therefore, the correct answer is B.

What Is the Payoff on a 75 Strike Asian Option