Annapurna Option

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Atlas Options

    An equity-based exotic option from the family of mountain range ...
  2. Basket Option

    A type of financial derivative where the underlying asset is ...
  3. Mountain Range Options

    A family of exotic options based on multiple underlying securities. ...
  4. Exotic Option

    An option that differs from common American or European options ...
  5. Underlying

    1. In derivatives, the security that must be delivered when a ...
  6. Everest Option

    A type of exotic equity option belonging to a class known as ...
RELATED FAQS
  1. How do I use a "basket" option?

    A basket option is an option with an underlying asset "basket" of securities, currencies or commodities. Basket options are ... Read Full Answer >>
  2. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  3. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  4. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  5. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
  6. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Exotic Options: A Getaway From Ordinary Trading

    Exotic options are like regular options, except that they have unique features that make them complex. These unusual investment vehicles can reignite your interest in trading.
  2. Investing Basics

    Pin Down Stock Price With Real Options

    How can you assign a value to what a company may do with its business in the future? We explain how it works.
  3. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  4. Options & Futures

    Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.
  5. Investing Basics

    Explaining Gamma

    Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security.
  6. Economics

    Will the Selloff in China Hurt the Global Economy?

    Though China is the world’s second largest economy, its volatility in the stock market is unlikely to have an impact on the global or Chinese economy.
  7. Investing

    Looking To Begin Trading In The Stock Market?

    If you are a new trader, we explain the differences between penny stocks and options so you can make the best decision for your personal trade plan.
  8. Investing Basics

    How Does Delta Hedging Work?

    Delta hedging is a derivative trading strategy that attempts to reduce -- or eliminate -- the risk caused by price changes in the underlying asset.
  9. Options & Futures

    Tesla Stock Too Expensive? Trade Tesla Options

    Tesla Motors is trading around $260 a share, making it too expensive for many investors. Options offer a low-cost way to trade in Tesla.
  10. Economics

    How An Aging World Can Impact Your Portfolio

    It can be easy for investors to lose sight of longer-term, structural developments in favor of more ephemeral trends and fads in the financial markets.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!