Frequently Asked Question

November 05 2008 | Filed Under ยป , , , , ,

How do I use a "basket" option?

A basket option is an option with an underlying asset "basket" of securities, currencies or commodities. Basket options are a popular way to hedge portfolio risk. Meanwhile, using the basket option costs significantly less than buying an option on the individual components of the portfolio.

Basket options often are used as a cost-effective way for portfolio managers to consolidate multicurrency exposures. This works because a basket option offers the unique characteristic of a strike price based on the weighted value of the basket of currencies, calculated in the buyer's base currency. The buyer chooses the maturity of the option, the foreign currency amounts for the basket and the aforementioned strike price.

(For more on this topic, read Options Basics.)

This question was answered by Bob Schneider.
by

Bob Schneider

Bob Schneider
Bob Schneider worked in the equity research department of Morgan Stanley for six years, including three years as supervisory analyst and senior editor of the company's Tokyo office. He has written hundreds of articles on business and computer topics, including XBRL, Japanese equities, fundamental research and accounting basics. Schneider is the author of "Hands-On Microsoft Access" (2006), an intermediate guide to the database management program. He holds Series 16 (supervisory analyst) and Series 65 (investment advisor) licenses. He is a CPA (inactive) in the State of New York and a graduate of Columbia University Business School.
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