Asian Options Can Be More Expensive

Abstract

This paper examines a commonly accepted proposition that Asian options are cheaper than their plain vanilla counterparts. By deriving and analyzing the boundary conditions of options as the volatility goes to zero, we show that this proposition may be violated for call options if the options are dividend-unprotected, and if the dividend yield of the underlying stock is higher than the interest rate. It may also be violated for put options if the dividend yield of the underlying stock is lower than the interest rate, or if the options are dividend-protected. The sufficient conditions causing Asian options to be considered more valuable than their plain vanilla counterparts are provided.

Keywords: Asian option, exotic option, option pricing

JEL Classification: G13