AVERAGE RATE OPTION - ARO
It is an option that is used in hedging against the exchange rates’ fluctuations by comparing the average spot rates of the option over its life to the option’s strike price. These options are normally being bought in a daily, weekly, or monthly period. When the option reached maturity, the spot prices’ average and the strike price will be compared. If the average rate is lower than the strike price, the issuer of the option will pay the difference. If it’s the other way around, the option will just expire with no additional payment.
These options are commonly used by different companies to get payments over a period of time that have a foreign currency denomination.
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