Hi!I have always assumed that Asian options were cheaper not only than the simple option with the same terms, but also that the more frequent the averaging the cheaper the option, because of a volatility dampening effect.Some models I use and some volatiltiy adjustements suggested in the litterature to approximate valuation with the Black-Scholes model seem to contradict this.Any thoughts?Andre

I am developing a GJR-GARCH pricing model for an Asian option. I've already implemented a simple BS one using Monte Carlo. I've never seen any of my opions being priced higher than its European equivalent. I did see that when the option term is long and/or volatility is high, then the Asian option will be substantially underpriced unless you also increase the number of MC trials.Can you elaborate on what type of Asian option you are dealing with? I only price the ones with fixed strike and using arithmetic average of the closing prices of the last n days.

Considering for instance a in the money call option on a stock whose forward is negative and volatility very low (let's say 0), it makes sense that the asian is more expensive than its european equivalent.

Well, asian calls can be sometimes more expensive that european calls. One situation is when the you take an underlying, which has a (very) negative cost of carry (occuring e.g. in exotic FX markets or for stocks paying high dividends). Furthermore, once the averaging period for the asian option has started, there are very simple situations where it becomes more expensive than the european.

QuoteOriginally posted by: lupascuWell, asian calls can be sometimes more expensive that european calls. One situation is when the you take an underlying, which has a (very) negative cost of carry (occuring e.g. in exotic FX markets or for stocks paying high dividends). Furthermore, once the averaging period for the asian option has started, there are very simple situations where it becomes more expensive than the european.This makes sense. The Asian options I priced are on equity. Also, the options stop trading once they enter their averaging period. So it is very unlikely that my options can be more expensive than its european equivalent.

What model do you use for the valuation? MC or closed form approximation? Maybe it would be useful to post the parameters you are using for pricing. We could then have a closer look at it.