DEFINITION of 'Himalayan Option'

An exotic equity option belonging to a class known as mountain range options. Himalayan options are based on a basket of underlying securities, as opposed to the typical listed (vanilla) option, which has one underlying security.

BREAKING DOWN 'Himalayan Option'

The payout for a Himalyan option is based on the average performance of the underlying assets over the life of the option. Periodic measurement dates are established and on each date, a payout is made based on the best-performing security in the basket. This security is then removed from the basket. This process continues until a single security is left. The option's total payout is the sum of all the periodic payments.

Himalayan options can be extremely difficult to properly value because the payout is linked to a basket of securities. The content and volatility of the basket will change over time as securities are periodically eliminated. This is why Himalayan options are only held by large institutional investors, typically as a long-term hedge.

Asian options also have payouts based on average performance over the life of an option, but just one underlying security is used.

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