BROWSE

Rainbow Option

Definition

Rainbow option is a derivative exposed to two or more sources of uncertainty, as opposed to a simple option that is exposed to one source of uncertainty, such as the price of underlying asset.

What is 'Rainbow Option'

A single option linked to two or more underlying assets. In order for the option to pay off, all the underlying assets must move in the intended direction.

Explaining 'Rainbow Option'

The underlying securities can have different characteristics, such as expiry date and strike price, but all must move in the way the option holder has bet they will.

Here's a sports-betting analogy that demonstrates a rainbow option: suppose you're at a baseball tournament with three fields backing one another. One game is halfway through, a second is just starting and a third starts in an hour. A type of bet that's analogous to a rainbow option is one that earns you a profit if you pick all three winners, but gets you nothing if any one team you pick is a loser.


Further Reading


Upper and Lower Bounds on Rainbow Option Prices under Uncertainty
en.cnki.com.cn [PDF]
… Thanks to the 2005 Mathematics of Finance class at the University of the Witwatersrand for alert … A rainbow option with n assets will require the n-variate cumulative normal function for application … of (Genz 2004), so here we apply this code to European rainbow options with three …

Continuous rainbow options on commodity outputs: what is the real value of switching facilities?Continuous rainbow options on commodity outputs: what is the real value of switching facilities?
www.tandfonline.com [PDF]
… Thanks to the 2005 Mathematics of Finance class at the University of the Witwatersrand for alert … A rainbow option with n assets will require the n-variate cumulative normal function for application … of (Genz 2004), so here we apply this code to European rainbow options with three …

Valuing a multi-product mining project by compound rainbow option analysisValuing a multi-product mining project by compound rainbow option analysis
www.tandfonline.com [PDF]
… Thanks to the 2005 Mathematics of Finance class at the University of the Witwatersrand for alert … A rainbow option with n assets will require the n-variate cumulative normal function for application … of (Genz 2004), so here we apply this code to European rainbow options with three …

A pricing model of fuzzy rainbow optionsA pricing model of fuzzy rainbow options
ieeexplore.ieee.org [PDF]
… Thanks to the 2005 Mathematics of Finance class at the University of the Witwatersrand for alert … A rainbow option with n assets will require the n-variate cumulative normal function for application … of (Genz 2004), so here we apply this code to European rainbow options with three …

A Study on the Rainbow Option Pricing Model with Transaction Costs <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-HFXZ200604009.htm' />A Study on the Rainbow Option Pricing Model with Transaction Costs [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-HFXZ200604009.htm'>PDF]
… Thanks to the 2005 Mathematics of Finance class at the University of the Witwatersrand for alert … A rainbow option with n assets will require the n-variate cumulative normal function for application … of (Genz 2004), so here we apply this code to European rainbow options with three …

Fractional white noise calculus and applications to financeFractional white noise calculus and applications to finance
www.worldscientific.com [PDF]
… Thanks to the 2005 Mathematics of Finance class at the University of the Witwatersrand for alert … A rainbow option with n assets will require the n-variate cumulative normal function for application … of (Genz 2004), so here we apply this code to European rainbow options with three …

Sequential real rainbow optionsSequential real rainbow options
www.tandfonline.com [PDF]
… Thanks to the 2005 Mathematics of Finance class at the University of the Witwatersrand for alert … A rainbow option with n assets will require the n-variate cumulative normal function for application … of (Genz 2004), so here we apply this code to European rainbow options with three …

Valuing an Early‐Stage Biotechnology Investment as a Rainbow OptionValuing an Early‐Stage Biotechnology Investment as a Rainbow Option
onlinelibrary.wiley.com [PDF]
… Thanks to the 2005 Mathematics of Finance class at the University of the Witwatersrand for alert … A rainbow option with n assets will require the n-variate cumulative normal function for application … of (Genz 2004), so here we apply this code to European rainbow options with three …



Q&A About Rainbow Option


Do all of the underlying assets have similar characteristics?

No, they do not have similar characteristics; however, they must move in the way that you bet they will.

What kind of trader should consider using this option?

Traders who wish to reduce risk should consider using this option.

If you want to profit from this type of investment what should you do first?

You should determine how much money you would like to invest in this type of investment and then choose which bets interest you most based on their potential payout amounts and probabilities .

How much money will you make if your prediction comes true ?

If your prediction comes true , then you will make Rs 100 per lot .

Is it possible to win with a rainbow option if some but not all picks win?

Yes, it is possible to win with a rainbow option if some but not all picks win.

Why would anyone want to do that ?

To reduce risk .

What is a rainbow option?

A single option linked to two or more underlying assets.

Where are the trades placed for Rainbow Options?

Trades are placed on exchanges like NSE or BSE .

Who might use this type of investment strategy ?

Rainbow options may appeal most to investors who enjoy betting on sports games because it allows them to place multiple bets at once .

Can you make money with a rainbow option if only one of your picks wins and none of them lose?

No, you cannot make money with a rainbow option if only one pick wins and none lose.

Can you explain what a rainbow spread is ?

A rainbow spread is when you buy one call and sell two calls at different strike prices but same expiry date .

What is Rainbow Option?

Rainbow Option is a type of option.

How do you trade in Rainbow Options?

You need to open an account with a broker and deposit money into it before trading in these options.

Who can use Rainbow Options?

Anyone can use these options.

What does the article focus on?

The article focuses on how to use this type of option.

What does the term "underlying asset" mean?

The term "underlying asset" refers to an asset that is being used as collateral for an investment.

How many underlying assets are there in a rainbow option?

There can be two or more underlying assets.

Are all of the underlying assets different from one another?

Yes, they must be different from each other.

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