Rainbow Option
What is a Rainbow Option?
A rainbow option is an option linked to two or more underlying assets.
How Does a Rainbow Option Work?
Just as rainbows have many colors, options can have many underlying assets. A Margrabe option, for example, gives the buyer the right but not the obligation to exchange one asset for another at a set price on or before the expiration date. In order for an option like this to make money for the investor, the price of the first asset and the price of the second asset both have to move in the desired direction to make exchanging one asset for another worthwhile. Because the option has "more than one color," we call Margrabe options rainbow options, though any option that derives its value from more than one asset is considered a rainbow option.
Why Does a Rainbow Option Matter?
Rainbow options can be difficult to analyze because of their many moving parts, but the main idea is that all of the underlying assets in a rainbow option have to move in the "right" direction in order for the investment to pay off.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
