What are the mountain range options?
The mountain range options are a family of exotic options based on several underlyings securities. Mountain range options were first marketed by French securities firm Societe Generale in 1998. These options combine some of the key features of basket style Where rainbow options– both of which have more than one underlying security or asset – and range options with multi-year time ranges.
Key points to remember
- Mountain Range Options are a family of exotic options based on multiple underlying securities.
- They combine many underlying assets into a single option and have the characteristics of basket and range options.
- Prices are based on several variables, including correlations between individual securities in the basket.
- The Altiplano, Annapurna, and Himalaya options are types of mountain range options.
Understanding Mountain Range Options
Choice are derivatives. Their values are based on the value of underlying asset they represent as actions. With a option contractthe investor has the possibility, but not the obligation, to buy or sell the underlying asset at the latest on a predetermined date.
Options can vary, ranging from vanilla to exotic options. vanilla option are common to different types of investors who want hedge their bets when it comes to certain assets. Exotic options can be more complicated because their expiration dates, prices, and other characteristics are different and tend to be much more complicated than traditional options.
Mountain range options are exotic options. While a regular option involves a single underlying asset, a mountain range option combines many underlying assets into a single option. Trading is usually done over the counter (OTC) by financial institutions and private, institutional investors. Mountain range options take on characteristics of both basket options and range options – the former represents a basket or group of assets, while the latter allows traders to benefit from the difference between the high and the low level of the option. The performance of the underlying assets plays an important role in the gain an investor receives.
The price of a mountain range option is based on multiple variables, the most important of which are the correlations between individual securities in the basket. Some options are discreet payment levels, such as doubling the investment or tripling the investment, if certain performance metric are affected by the underlying securities while the option is in effect.
Mountain range options cannot be priced with standard closed form approaches. Rather, these exotic instruments require Monte Carlo simulation methods. Effects such as volatility biasfound in most options, can be even more pronounced in mountain range options.
Special Considerations
It is often difficult to determine the fair market value (FMV) of these exotic options. Indeed, the application of standard formulas is almost impossible. Some types of mountain range options have recalculation or sample dates, at which best or worst performing actions from the basket are deleted. Therefore, option holders must constantly re-evaluate the parameters affecting their current position or current value (PV).
Given their esoteric nature, how can mountain range options be traded? A good example might include a scenario where a hedger prefers not to monitor multiple written options on individual assets. A basket option can offer the same protection by covering several positions with a single derivative.
This approach is combined volatility may be lower than the net volatility of the individual assets, thus resulting in an otherwise lower option price, which can be costly for a rather sophisticated position. These characteristics have helped make mountain range options an attractive option for traders looking for a reasonably priced strategy that requires minimal capital guarantees.
Types of mountain ranges
Mountain range options are named after a series of mountains, each representing a different contract type. Some of the most common include:
- Altiplano Options: Altiplano Options offer investors the characteristics of a traditional vanilla option and a coupon payment.
- Annapurnas Option: coupon rate are determined by the performance of the worst performing security in the basket when it falls below a specified range.
- Everest Option: Everest options impose a long-term limit on a investor option while offering late-in-cart performance-based payment.
- Atlas Options: This type of option eliminates both the best and worst performing stocks from a basket of stocks.
- Himalayan Options: Traders receive a payout based on the best performing stock in the basket. Payments are provided on multiple dates.
