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.
BREAKING DOWN '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.