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. Do you have to be an expert investor to trade put options?

    Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ... Read Answer >>
  2. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
  3. How do speculators profit from options?

    As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by ... Read Answer >>
  4. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
  5. Are put options more difficult to trade than call options?

    Learn about the difficulty of trading both call and put options. Explore how put options earn profits with underlying assets ... Read Answer >>
  6. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >>
Related Articles
  1. Options & Futures

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
  2. Options & Futures

    Trading Options on Futures Contracts

    Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ...
  3. Options & Futures

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  4. Options & Futures

    Options Pricing

    Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.
  5. Options & Futures

    A Newbie's Guide To Reading An Options Chain

    Learning to understand the language of options chains will help you become a more informed trader.
  6. Options & Futures

    Options Basics: How To Read An Options Table

    Sponsor: At last, an easy way to predict stock trends – get your FREE copy of 5 Chart Patterns You Need to Know. By Jay Kaeppel As more and more traders have learned of the multitude of ...
  7. Options Traders

    An options trader is anyone who buys and sells options in the capital market. As options trading is most commonly conducted through online option trading brokers, it is also commonly known as ...
  8. Trading Strategies

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  9. Options & Futures

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  10. Options & Futures

    Options Basics: What Are Options?

    An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock ...
RELATED TERMS
  1. Basket Option

    A type of financial derivative where the underlying asset is ...
  2. Basket Of Goods

    A relatively fixed set of consumer products and services valued ...
  3. Market Basket

    A subset of products or securities that is designed to mimic ...
  4. Currency Basket

    A selected group of currencies in which the weighted average ...
  5. Himalayan Option

    An exotic equity option belonging to a class known as mountain ...
  6. Index Option

    A financial derivative that gives the holder the right, but not ...
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center