Basket Option

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DEFINITION of 'Basket Option'

A type of financial derivative where the underlying asset is a group of commodities, securities or currencies. Like other options, a basket option gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price, on or before a certain date (the holder has the option to buy or sell, or to let the option expire worthless). With a basket option, however, the holder has the right, but not the obligation, to buy or sell a group of underlying assets. A basket option is considered an exotic option.

INVESTOPEDIA EXPLAINS 'Basket Option'

A currency basket option provides a more cost effective method for multinational corporations to manage multi-currency exposures on a consolidated basis. For example, a global corporation such as McDonald's might buy a basket option involving Indian rupees and British pounds, in exchange for U.S. dollars.


The currency basket option has all the characteristics of a standard option, but the strike price is based on the weighted value of the component currencies (calculated in the holder's base currency). A basket option often costs less than multiple single options.

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RELATED FAQS
  1. 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 ... Read Full Answer >>
  2. What does it mean to be long or short a derivative?

    A derivative is a type of security in which the price of the security is dependent on one or more underlying assets. A derivative ... Read Full Answer >>
  3. What is an over-the-counter derivative?

    A derivative is a type of security in which the price of the security depends on the price of the underlying asset. Depending ... Read Full Answer >>
  4. What does the underlying of a derivative refer to?

    A derivative security is a financial instrument in which the price of the derivative is dependent on its underlying asset. ... Read Full Answer >>
  5. What kinds of derivatives are types of contingent claims?

    A contingent claim is another term for a derivative with a payout that is dependent on the realization of some uncertain ... Read Full Answer >>
  6. What does it mean to take delivery of a derivative contract?

    When trading derivative contracts for options, a buyer or holder may have to take delivery of the underlying asset if the ... Read Full Answer >>
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