What averaging is worth calculator
What “average of the final twelve closes” costs you.
Interactive: what averaging is worthHard
Many structured products settle on an average of observations rather than the closing level. Averaging cuts the effective volatility of the payoff, and a cheaper option means less value delivered to you for the same headline terms.
- Effective volatility
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- Averaged (Asian) call
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- Ordinary call
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- The averaging discount
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- Why
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The continuous geometric-average case has a closed form, which is why it is used here: no simulation, no random numbers, a number you can check. Arithmetic averaging is slightly more valuable but has no exact formula; the discount is of the same order. When a term sheet says "average of the final twelve monthly closes", this is the size of what that sentence did — see how to read a term sheet.
The idea behind it
This calculator belongs to Volatility, where the mechanism it computes is explained step by step, with the formula, what each input means and where the simple model stops being right. Everything is computed in your browser; nothing you type is sent anywhere.
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