If you're trying to calculate Value-at-Risk, the first thing to remember
is that the basic techniques for VaR do not really depend on the assets
concerned. With an (arithmetic-average) Asian option, there is no
closed-form solution even for the simple European case. There are
several ways one can calculate VaR when confronted with this kind of
asset:

1) Historical simulation
The specific details of this approach are given in Hull's book, Ch.17.
Basically, just take the option's price over the last n days and "shock"
the price using historical data. The result will give you your one-day
VaR for the option, which can then be converted into an n-day VaR
through standard methods.

2) Use closed-form approximations across a range of underlying asset
prices
This is the approach that I like the least. One can use the usual
Turnbull-Wakeman approximation for a European Asian option, extract a
distribution of possible results, and use this for VaR over an n-day
period. I dislike this approach because it imposes a distribution
assumption with which I am not comfortable- namely, that the arithmetic
average of lognormal random variables is also lognormally distributed
(which it isn't).

3) Monte Carlo Simulation
This is the slowest but most robust method. Simulate out the underlying
asset prices, take averages along each path as required, and calculate
the option's payoff at maturity. Discount each payoff back to the
present by the risk-free rate. You will be left with a distribution of
possible option prices, giving you the VaR of the position.

You're going to need Hull's book (at minimum) to tackle these questions.
Chapter 17 should give you all the information and tools you need.

On Sun, 2010-03-21 at 09:00 -0800, Bogaso wrote:

> Hi all,
> 
> Here I am mandated to find the VaR for an Asian type option say call option,
> wherein pay-off for that option will be simple average of daily prices (20
> trading days) for next month. For example today it is 21st-march and pay-off
> will be daily average for all trading days for the month of april, which is
> going to expire on the last trading day of april. 
> 
> I am clear on calculating VaR, at least daily, for European type option
> wherein distribution of option price for next day is determined using BS
> formula and hence the distribution of P/L for the option premium. However in
> current case as option is path-dependent possibly there is no closed form
> solution available to determine the fair price of the option. Therefore I am
> seeking help on how to deal with my present case. If experts here give some
> clue as well as some published documents or books on the regard I would be
> truly grateful. Whatever I am aware of is calculation of VaR for plain
> vanilla option.
> 
> Thanks,



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