ALTIPLANO OPTION

A type of mountain range option that offers a specific coupon payout in addition to the features of a vanilla option. Altiplano options are a type of basket option, in that there is more than one underlying security. As such, the pricing is determined not only by the implied volatility of each security, but also by the correlations between them. If none of the securities in the Altiplano basket outperforms a specified benchmark rate of return during the life of the option, then the option payout is just the specified coupon. But if any one of the underlying passes the benchmark, then the option converts to a vanilla call option on each of the underlying securities or assets.

Typically, stocks are the underlying securities, and only certain stocks have appeared in the most prevalent altiplano issues. These options are created for, and traded by, institutional investors such as banks and hedge funds. Their pricing formulas involve complex Monte Carlo simulations or other simulation techniques that require setting up a set of correlations between the strike price of each underlying security. Because Altiplano options include a guaranteed payout if certain negative events occur, they may be more expensive than an aggregate of vanilla options on the same set of underlying stocks.