Abstract
This article extends the concept of flexible geometric Asian options to flexible arithmetic Asian options (FAAO). It provides an analytical approximation solution for the FAAOs using a method to approximate standard arithmetic Asian options with their corresponding geometric Asian options. The FAAOs include the standard equally weighted arithmetic Asian options as special cases and plain vanilla options as limiting cases. Comparisons between the approximation and simulation results show that the approximation formula provides very good approximation with reasonable parameters. The approximation formula not only reduces calculating time substantially but also simplifies expression of the Asian options.
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