Which one of the following four option types would most likely meet these specific foreign currency demands?

A large energy company has a recurring foreign currency demands, and seeks to use options with a pay-off based on the average price of the underlying asset on either a few specific chosen dates or all dates within a specific pricing window.

Which one of the following four option types would most likely meet these specific foreign currency demands?
A . American options
B . European options
C . Asian options
D . Chooser options

View Answer

Answer: C

Explanation:

Asian options are a type of derivative that have a payoff based on the average price of the underlying asset over a certain period or on specific dates. This averaging mechanism makes them particularly useful for companies with recurring foreign currency demands, as it helps smooth out volatility and provides a more stable hedge against currency fluctuations. Given the large energy company’s need for an option that fits the description of averaging prices over specific dates or within a pricing window, Asian options are the most suitable choice.