DEFINITION of 'Mountain Range Options'

A family of exotic options based on multiple underlying securities. Mountain range options were first created by French securities firm Société Générale in the late 1990s. These options blend some of the key characteristics of basket-style or rainbow options (which have more than one underlying security or asset) and range options, which have multiyear time ranges.

BREAKING DOWN 'Mountain Range Options'

The price of a mountain range option is based on multiple variables, the most important of which is the correlations between the individual securities in the basket. Some options have discrete payout levels (e.g., double the investment, triple the investment) if certain performance metrics are hit by the underlying securities while the option is in effect.

Types of mountain range options include Altiplano options, Annapurna options, Everest options, Atlas options and Himalayan options. They are traded over-the-counter (OTC), typically by private banks and institutional investors such as hedge funds.

The difficulties in determining the fair market value for these exotic options makes standard formulas (like the Black-Scholes method for vanilla options) nearly impossible to apply. Certain types of mountain range options have recalculation or sampling dates, at which the best- or worst-performing stocks from the basket are removed. Thus, holders of these options must constantly re-evaluate the parameters affecting their current value. Effects such as volatility skew, which is found in most options, can be even more pronounced within mountain range options.

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