DEFINITION of 'Multi Index Option'

A type of investment in which the payoff depends on the difference in performance between two indexes or other financial assets. The payoff from the option is governed by the change in the spread between the indexes or assets. These options are generally settled in cash.

BREAKING DOWN 'Multi Index Option'

The payoff of a multi index option does not depend on market direction, rather a change in spread. For example, consider a multi index option on the likelihood of the S&P 500 outperforming Canada's TSX Composite after a year's time by five percentage points. After a year, if the S&P 500 has declined 2% but the TSX has declined 9%, the option will still have a positive payoff because the S&P 500 has outperformed the TSX by seven percentage points. If the S&P 500 outperforms by less than five percentage points after a year, the option will expire worthless.

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