how to calculate volatility of an arthimetic asian option

bmanas · December 5th, 2009, 4:20 am

for an asian option based on n observations on an underlier, each observation would have forward value and a volatility for that underlier. The asian average of the forward values would be just an arthimetic average but what about volatility.How does one calculate volatility of asian option.thanks

DavidJN · December 5th, 2009, 3:27 pm

I assume you are asking how to calculate historical volatility. To price an asian option you need the volatility of the underlying, you do not need the volatility of the average of the underlying. The model takes care of the averaging effects. So, you calculate volatility the same way you would for any vanilla option.

bmanas · December 8th, 2009, 1:55 am

thanks a lot for the reply.