Valuation (Cont)
▪ The payoff from an average price call is
푚푎푥
푆ҧ푇 1 +푆푎푣푔푇 2
푇 1 +푇 2
−퐾, 0
where
Savg the average asset price of period T 2 (future period)
푆ҧ the spent average asset price of p)eriod T 1 (realized period
▪ This is the same as
푇 2
푇 1 +푇 2
푚푎푥 푆푎푣푔−퐾∗, 0
where
퐾∗ =
푇 2
푇 1 +푇 2
퐾−
푇 1
푇 2
푆ҧ