DEFINITION of 'Annapurna Option'

A form of option contract from the "mountain range" series of exotic options. Annapurna options offer a combination of a fixed coupon rate and participation in the equity gains of an underlying basket of securities. The coupon rate is dependent on when the worst-performing stock of the group falls below a prespecified level. The longer it takes for the worst-performing stock to reach the predetermined low point, the higher the coupon payment the investor will receive. The equity participation rate (in the underlying securities) also rises as the Annapurna option lasts longer before the payout phase.

BREAKING DOWN 'Annapurna Option'

Mountain range options are very difficult to value because of the increased variables that must be analyzed, such as the correlation between the individual securities in the basket and the coupon step-up rates that are offered at longer time horizons. Annapurna options have only been on the market since the late 1990s, and only a few select stocks have ever found themselves marketed inside one. Investors in these exotic options will aim to let the option ride out as long as possible (and conceivably earn the highest total return) by choosing stocks that will consistently rise, with the hopes that none of the group ends the life of the option by falling too far.

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