Annapurna Option

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.



comments powered by Disqus
Hot Definitions
  1. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  2. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  3. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  4. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
  5. Retail Sales

    An aggregated measure of the sales of retail goods over a stated time period, typically based on a data sampling that is extrapolated to model an entire country. In the U.S., the retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce.
  6. Okun's Law

    The relationship between an economy's unemployment rate and its gross national product (GNP). Twentieth-century economist Arthur Okun developed this idea, which states that when unemployment falls by 1%, GNP rises by 3%. However, the law only holds true for the U.S.
Trading Center