Last week the first couple of trades were executed in the new CBOE FLEX® index options with Asian-style settlement. Open interest for the new CBOE Asian-style FLEX options has grown to more than 680 contracts, representing notional value of more than $6 million..
A recent article at EQDerivatives.com noted that –
“An insurance firm has traded the first listed Asia-style flexible exchange option, which were listed on the Chicago Board Options Exchange last month. Agency only broker X-Change Financial Access facilitated the trade, which involved an Asia-style call spread on a broad-based U.S. index.. …”
An Asian-style option, also known as an “averaging option,” is an option whose settlement value is based on an average of the underlying index closing prices throughout the contract’s life, as opposed to the single price at expiration. CBOE Asian FLEX index options have a term of approximately one year with 12 monthly observation dates.
Insurance companies that write indexed annuity contracts often have exotic option liabilities embedded within those annuity contracts. One of the most common types of exotic options is an option with Asian-style settlement. Insurance companies seeking to hedge embedded exotic option risk have historically traded exclusively in the over-the-counter (OTC) market. The introduction of Asian FLEX index options is expected to provide insurers with an alternative hedging tool to OTC market products, while also providing traditional exchange-traded benefits like enhanced price discovery, transparency and centralized clearing. For the past 43 years, CBOE has been and continues to be a leader in terms of providing innovative options-based risk-management solutions for investors.