Which type of option can only be exercised at the expiration date?

The type of option that can only be exercised at the expiration date is the European option. This characteristic is crucial in differentiating European options from American options, which can be exercised at any time before or on the expiration date.

European options provide a unique aspect of risk and return for investors, as they do not allow for early exercise, potentially impacting their valuation and the strategies used in trading. Specifically, the payoff of a European option is determined solely based on the underlying asset’s price at expiration, rather than at multiple points in time throughout the life of the option.

In the context of trading and options pricing models, understanding the exercise style of options is fundamental. European options often have different pricing models compared to American options due to this exercise limitation, which can be essential for making informed investment decisions. This clarity regarding the exercise timing helps traders and investors align their strategies with their financial goals and market predictions.