Here, we will derive formulas for European style power Asian call and put options when we are taking geometric average of the underlying’s price. We will put expectation and variance of the power geometric average into Black’s formula (generalized version), and will simplify it to obtain option formulas.
As we know that the expectation and variance of geometric average is
So, in case of Geometric power Asian option, we have
Now, we need to put these two values in Black’s formula (generalized version)
For simplicity, we set
Now, by putting all values in Black’s formula, we obtain the pricing formula for our geometric power Asian option.