Which type of option must be exercised at the expiration date?

European options are characterized by the requirement that they can only be exercised at the expiration date. This means that if an investor holds a European option, they are obligated to wait until the specified expiration date to execute their right to buy or sell the underlying asset at the predetermined strike price.

This structure contrasts with American options, which offer more flexibility by allowing the holder to exercise the option at any time before the expiration date, providing opportunities to capitalize on favorable market movements. Asian options, while having unique features related to averaging the price of the underlying asset over a specific period, also do not have the same exercise limitations as European options. Exotic options may come with a variety of complex features and conditions, but they do not inherently dictate that exercise can only occur at expiration.

Understanding these distinctions is important for investors in making informed decisions regarding their trading and investment strategies.