When we take the arithmetic average of the underlying, *A*(0,*T*) is calculated as

Our Black-Schloes-Merton model and Black’s model rely on the assumption that the underlying price follows a lognormal distribution. And, the arithmetic average of the lognormally distributed random variables is not a lognormal.

Turnbull and Wakeman (1991) valued arithmetic average Asian options using similar formulas to those used for regular options by assuming that *S*_{ave} is a lognormal. He, first, calculated the first and the second moments of *S*_{ave} during the option life, and then assumed that the *S*_{ave} is lognormally distributed with the first and the second moments, and used Black’s model. Hence by setting

and

Where

and

in the Black’s formula, we obtain price for Asian (arithmetic average) call and put options as follows

Where

And, if the stock is paying a dividend yield at rate *q* per annum, we need to replace *r* by *r−q*, and the formulas for *M*_{1} and *M*_{2} will become

and