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Contingent Payout Option
Standard Option vs. Contingent Payout Option on the CAC 40 Index
A variation on a standard option in which the holder's payout is contingent not only on the behavior of an equity rate or index price but on the behavior of a second financial or economic variable as well. One of the most common varieties of contingent payout option is an option on a specific stock index, with the investor's ability to collect a payout contingent upon an exchange rate relationship or an interest rate relationship. For example, an investor may feel that a decline in French interest rates will cause the CAC 40 index to perform extremely well over the next six months but the investor may be convinced that good stock performance will not be achieved unless French interest rates decline. To the extent that the correlation between stock prices and interest rates in France is less than perfect, the investor can reduce his premium outlay by purchasing an option on the CAC 40 with its payout contingent upon a specified movement in French interest rates. Depending on the correlations which the seller of the option anticipates and how much of a movement in interest rates the option buyer is willing to specify, introducing this contingency might reduce the option premium substantially. Also called Equity Rate Contingency Option, Contingent Currency Option, Dual Contingency Option, Stock Index Contingent Option. Compare with Contingent Premium Option. See also Interest Rate Contingent Option, Multi-Asset Option.
  
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