It stands for average rate option; an option in which the exercise price is equal to the average of the asset’s price over the life of the option. In this sense, the average rate option differs fundamentally from the European option and American option, where the payoff of the option contract is dependent on the price of the underlying instrument at maturity. There are two types of average rate options: fixed-strike average rate options and floating-strike average rate options. In pricing this type of options, the so-called Variance Gamma Model is implemented using the Bondesson series.

This option is also known as an average option, average price option or Asian option.