Valuation (Cont)
▪ By assuming that the average asset price is lognormal, an analyst can use
Black's model.
▪ The present value of an Asian call option is given by
푃푉퐶 = 푀 1 푁 푑 1 −퐾푁(푑 2 ) 퐷
푑 1 , 2 =
푙푛 푀 1 Τ퐾 ±휎^2 푇Τ 2
휎 푇
휎^2 =
1
푇
ln(
푀 2
푀 12
)
where
D the discount factor
N the cumulative standard normal distribution function
T the maturity date