Himalayan Option

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Altiplano Option

    A type of mountain range option that offers a specific coupon ...
  2. Everest Option

    A type of exotic equity option belonging to a class known as ...
  3. Asian Option

    An option whose payoff depends on the average price of the underlying ...
  4. Vanilla Option

    A financial instrument that gives the holder the right, but not ...
  5. Underlying

    1. In derivatives, the security that must be delivered when a ...
  6. Mountain Range Options

    A family of exotic options based on multiple underlying securities. ...
Related Articles
  1. Exotic Options: A Getaway From Ordinary ...
    Options & Futures

    Exotic Options: A Getaway From Ordinary ...

  2. The Barnyard Basics Of Derivatives
    Investing Basics

    The Barnyard Basics Of Derivatives

  3. Are Derivatives A Disaster Waiting To ...
    Options & Futures

    Are Derivatives A Disaster Waiting To ...

  4. Are Derivatives Safe For Retail Investors?
    Options & Futures

    Are Derivatives Safe For Retail Investors?

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center