Definition of Rainbow option:
Derivative having two or more underlying assets or factors (called colors) which cannot be interpreted as a single composite asset or factor. Margrabe options are a type of rainbow options.
Other names include correlation options and basket options. In general, rainbow options are structured as calls and/on puts on the best of or worst of as it relates to the underlying asset.
A rainbow option is an options contract linked to the performances of two or more underlying assets. They can speculate on the best performer in the group or minimum performances of all the underlying assets at one time. Each underlying may be called a color so the sum of all of these factors makes up a rainbow. These structures can be rather exotic and made for institutional clients when referring to financial assets.
How to use Rainbow option in a sentence?
- Rainbow options come in different types and are usually dependent on multiple variables and underlyings. They are usually structured so that the option only activates once certain parameters are triggered.
- A rainbow option is an exotic option usually available only to institutional investors.
Meaning of Rainbow option & Rainbow option Definition