A rainbow option payoff depends on the
relative price performance of two or more assets.
A rainbow option gives the holder the right to buy or sell the best or worst of
two securities, or options that pay the best or worst of two assets. Rainbow options
are popular because of the lower premium cost of the structure relative to the
purchase of two separate options. The lower cost reflects the fact that the payoff
is generally lower than the payoff of the two separate options.
Financial Instruments Toolbox™ supports two types of rainbow options:
Minimum of two assets — The option holder has the right to
buy(sell) one of two risky assets, whichever one is worth less.
Maximum of two assets — The option holder has the right to
buy(sell) one of two risky assets, whichever one is worth more.
For more information, see Rainbow Option.