An option that accrues in value (payoff) for each day that the reference index rate remains within a specified range (known as the accrual range). For instance, an investor buys a range accrual option on a reference rate (say a stock index) where it matures in 3 months and pays USD 5000 for each day the stock index closes within an accrual range of 2000-2500. If the premium paid by the investor to the option’s seller is USD 50,000, then the investor will exercise the option if the reference has remained for more than ten days within the range over the time to maturity. Otherwise, the option ends up worthless, and the investor loses the premium amount.
This option is also called a range accumulation option.
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