Mountain Range Options
- Originally marketed by Société Générale in 1998.
- Traded over-the-counter (OTC), typically by private banks and institutional investors such as hedge funds.
- These options have combined characteristics of Range and Basket options.
- The options are active for a specified time (characteristic of Range options) and the payoff is dependant on the performances of multiple underlying assets (characteristic of Basket options).
- The five most commonly traded Mountain range options are Altiplano, Annapurna, Atlas, Everest and Himalayan. (names of mountain ranges! )
- The buyer receives a large coupon at maturity if the low barrier is not hit for any of the underlying basket securities.
- If the barrier is hit, the buyer receives the payoff of a plain vanilla or sometimes an Asian call on the basket.
- The buyer in these exotic options will aim to let the option ride out by choosing underlying stocks that will consistently rise.
- Gives the option holder a payoff if none of the stocks from the underlying basket of securities fall below a predetermined fraction of the initial value till maturity.
- The buyer has a bullish view on the underlying stocks.
- The more correlated the stocks in the underlying basket are, the higher the product price will be keeping all other trade parameters constant.
- A option here the some of the best and worst performing securities are removed from the basket of underliers on an observation date on or before the maturity.
- The payoff similar to a call option on the remaining securities basket at maturity.
- This product is somewhat similar in characteristics to an Asian call options. With outliers being removed from the basket – the payoff becomes even lesser volatile. The product should be cheaper to an Asian option with similar trade parameters.
- A long term option (10-15 years) with an underlying basket containing large number of stocks (10-25 stocks)
- Buyer receives a payoff on the worst-performing member of a large basket of stocks at maturity.
- Like an Asian option, the Himalaya is a call on the average performance of the best performing stocks within the basket.
- On each observation date, the return level of the best performing stock is locked in. The stock is then removed from the basket.
- On maturity when only one stock remains, the return level of the remaining security is locked in for payoff calculation.
- The option's total payout is the sum of all the interim locked in return levels.