Which of the following options would be the most cost effective to use?

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

A company that uses physical commodities as an input into its manufacturing process wishes to use options to hedge against a rise in its raw material costs.

Which of the following options would be the most cost effective to use?
A . Writer-extendible options
B . Correlation options
C . Vanilla options
D . Average rate options

Answer: D

Explanation:

Average rate options will be the most cost effective in this scenario as they are cheaper than vanilla options. Writer extendible options on commodities will be even more expensive, and correlation products are irrelevant to the manufacturing company’s hedging needs.