The average price call is a type of call option (predicting the price will go up) where the holder has the opportunity to buy the underlying asset. A type of exotic option (out of the ordinary), the payoff amount would be the average price by which the asset exceeds the strike price (the original agreed upon price) over a specific period of time.
Average price calls can be used for speculating or hedging, with the buyer having a bullish opinion of the asset.
For example, a corn grower in Iowa believes prices will be going up. So, she decides to hedge 1,000 bushels of corn for one month. Corn is now trading at $30 per bushel and an average price call option expiring in one month can be purchased for $3 with a strike price of $30. At the end of the month when the option is set to expire, if the average price of corn has gone up to $40 per bushel, the grower’s gain would be $7,000, which is the difference of $10 between the strike price and the average price minus the option premium paid of $3, times 1,000 bushels of corn.
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