Defining Mountain Range Options

What Are Mountain Range Options?

Mountain range options are a family of exotic options based on multiple underlying securities. Mountain range options were first marketed by French securities firm Société Générale in 1998. These options mix among the key characteristics of basket-style or rainbow options—each of which have multiple underlying security or asset—and range options with multiyear time ranges.

Key Takeaways

  • Mountain range options are a family of exotic options based on multiple underlying securities.
  • They mix quite a few underlying assets into one option and have the features of basket and range options.
  • Prices are based on multiple variables—notably the correlations between the person securities within the basket. 
  • Altiplano, Annapurna, and Himalayan options are sorts of mountain range options.

Understanding Mountain Range Options

Options are derivatives. Their values are based on the worth of the underlying asset they represent equivalent to stocks. With an options contract, the investor has the chance—but not the duty—to purchase or sell the underlying asset on or before a predetermined date.

Options can vary, starting from vanilla to exotic options. Vanilla options are common amongst various kinds of investors who wish to hedge their bets in relation to certain assets. Exotic options could also be more complicated because their expiration dates, prices, and other characteristics are different and are inclined to be way more complicated than traditional options.

Mountain range options are exotic options. While an everyday option involves a single underlying asset, a mountain range option combines quite a few underlying assets into one option. Trading generally happens over-the-counter (OTC) by financial institutions and personal, institutional investors. Mountain range options take features from each basket options and range options—the previous represents a basket or group of assets, while the latter allows traders to profit from the difference between the high and low level of the choice. The performance of the underlying assets plays an enormous part within the payoff an investor receives.

The worth of a mountain range option is predicated on multiple variables, crucial of that are the correlations between the person securities within the basket. Some options have discrete payout levels, equivalent to double the investment or triple the investment, if certain performance metrics are hit by the underlying securities while the choice is in effect.

Mountain range options can’t be priced with standard closed-form approaches. These exotic instruments as an alternative require Monte Carlo simulation methods. Effects equivalent to volatility skew, which is present in most options, may be much more pronounced inside mountain range options.

Special Considerations

It might often be difficult to find out the fair market value (FMV) of those exotic options. That is because applying standard formulas is almost inconceivable. Certain sorts of mountain range options have recalculation or sampling dates, at which the best- or worst-performing stocks from the basket are removed. Subsequently, options holders must consistently re-evaluate the parameters affecting their current or present value (PV).

Given their esoteric nature, how can mountain range options be traded? An excellent example might include a scenario when a hedger prefers not to watch multiple options written on individual assets. A basket option can provide the identical protection by covering several positions with a single derivative.

This approach’s combined volatility could also be lower than the web volatility of individual assets, thereby leading to an otherwise lower option price, which may be costly for a relatively sophisticated position. These features helped make mountain range options a pretty option for traders looking for a affordable strategy requiring minimal capital guarantees.

Kinds of Mountain Ranges

Mountain range options are named after a series of mountains, each representing a special sort of contract. A number of the commonest include:

  • Altiplano options: Altiplano options provide investors with the features of each a conventional vanilla option together with a coupon payment.
  • Annapurna options: Coupon rates are determined by the performance of the basket’s worst-performing security when it drops under a specified range.
  • Everest options: Everest options place a long-term limit on an investor’s option while offering a payout based on the lagging performers within the basket.
  • Atlas options: The sort of option eliminates each the best- and worst-performing stocks in a basket of securities.
  • Himalayan options: Traders receive a payout based on the basket’s best performing stock. Payouts are provided on multiple dates.

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