FRM Part I · FRM Exam Part I · Exotic Options
A corporate treasurer wants a currency option whose payoff depends on the average exchange rate over the next twelve months, because the company receives foreign-currency revenue evenly throughout the year. Which exotic option is best suited to this exposure?
An Asian option is best suited because its payoff depends on the average exchange rate over the period. This matches revenue arriving evenly through the year, whereas lookback, digital and barrier options depend on extremes, a fixed payout or a trigger level.
- AAsian optionCorrect
- BBarrier knock-out option
- CDigital (binary) option
- DLookback option
Explanation
An Asian option pays off on the average price of the underlying over a set period, which matches revenue received evenly through the year. A lookback depends on the maximum or minimum price, a digital pays a fixed amount, and a barrier depends on whether a level is touched.
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