A:

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.



RELATED FAQS

  1. What does it mean to be long or short a derivative?

    Find out more about derivative securities and what it indicates when traders or investors establish a long or short position ...
  2. What is an over-the-counter derivative?

    Learn more about over-the-counter derivatives and how they work with an example of a derivative trade-off exchange.
  3. What does the underlying of a derivative refer to?

    Find out more about derivative securities, what an underlying asset is and what the underlying assets refer to in stock options ...
  4. What kinds of derivatives are types of contingent claims?

    Read about contingent claim derivatives, such as options contracts, whereby the payout of the transaction is dependent on ...
RELATED TERMS
  1. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  2. Catastrophe Equity Put (CatEPut)

    Catastrophe equity puts are used to ensure that insurance companies ...
  3. Open Trade Equity (OTE)

    Open trade equity (OTE) is the equity in an open futures contract.
  4. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  5. Indicator

    Indicators are statistics used to measure current conditions ...
  6. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...

You May Also Like

Related Articles
  1. Charts & Patterns

    The 6 Most Profitable Grocery Stores

  2. Trading Systems & Software

    How To Trade In The Hong Kong Stock ...

  3. Trading Systems & Software

    Want To Trade Stocks In College? 5 Tips ...

  4. Trading Strategies

    The Pros & Cons Of Being A Trader On ...

  5. Chart Advisor

    Trade These Stocks on a Re-test of Breakout ...

Trading Center