Management of Asian and Cliquet Option Exposure at CBOE RMC

The speakers for this session were Pin Chung Chief Financial Officer and Chief Investment Officer, R+V International Business Services Limited and Dr. Rachid Lassoued, Head of Financial Engineering from Bloomberg. The session title was Management of Asian and Cliquet Option Exposures for Insurance Companies.

Dr. Chung began the session by reviewing Asian and Cliquet options. In general an Asian Option is an exotic option contract with a path dependent payoff. This means the payoff of the option depends on the average price of the underlying over a predetermined period of time. This average price can be either arithmetic or geometric. The option may also be an average price or average strike price option. The time period that the price is calculated may be over the whole life of the option, aver the last few days before expiration, or even over a select number of days agreed upon at inception of the trade. The strike may be fixed or floating and the majority of Asian options are European style with some also being American style.

Asian options may be useful when approaching foreign exchange markets when it is less risky to deal with an average over a period of time than a foreign exchange rate on a single date.   An Asian option may also be useful if there is concern regarding price manipulation on a certain date or when a market is thinly traded.

Dr. Lassoued follow up discussing the state of the variable annuity industry noting that some firms have exited the market. Ability to create diverse payout profiles to meeting client’s needs and customize risk reward profiles through adapted structuring. Firms need solutions that allow them the create products that will generate a locked-in profit with no sensitivity to market moves. A core challenge is that traditional long dated hedges are not dynamic enough and may be costly. There is also basis risk associated with long dated hedges.

CBOE is now offering FLEX Index Options that have Asian and Cliquet style settlement. Historically insurance companies have had to trade in the over-the-counter (OTC) market to get the exposure that is offered through these exotic options. The introduction of Asian and Cliquet FLEX index options provides insurers an alternative to the OTC markets. These alternatives offer benefits like enhanced price discovery, transparency, and centralized clearing.

More information on the FLEX Index Options –