What is the payoff on a 90 strike Asian option given it is a geometric average price put? The recent prices are 89,90,91,87,87,and 88.

Question

Quizplus · Accepted Answer

Since it's a geometric average price put option, we need to calculate the geometric average of the recent prices.

Geometric Average = (89 x 90 x 91 x 87 x 87 x 88)^(1/6) = 88.11

The option is in the money only if the average price is less than the strike price. In this case, the strike price is 90 and the geometric average is 88.11, so the option is in the money.

The payoff for a put option is: Payoff = Maximum(Strike Price - Average Price, 0)

Therefore, the payoff for this option is: Payoff = Maximum(90 - 88.11, 0) = 1.89

However, since it's a put option, we need to subtract the payoff from the strike price:

Payoff = Strike Price - Maximum(Strike Price - Average Price, 0) = 90 - 1.89 = 88.11

Therefore, the payoff on the option is 88.11.

The closest choice to this answer is B, 1.35, which may have been calculated incorrectly. The correct answer for the payoff on the given option is 88.11.

What Is the Payoff on a 90 Strike Asian Option