Basket Option

AAA

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.

RELATED TERMS
  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Burst Basket

    A burst basket refers to a particular type of stock transaction ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Currency

    A generally accepted form of money, including coins and paper ...
  5. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  6. Mountain Range Options

    A family of exotic options based on multiple underlying securities. ...
Related Articles
  1. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  2. Options & Futures

    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 ...
  3. Options & Futures

    Options -- Accessing Stakes In Apple At Less Cost

    Finding Apple stock costly to trade? Here are multiple ways to trade it through low-cost Apple options.
  4. Options & Futures

    These Are The Top Brokerage Firms For Options Trading

    Trading options? Here is the list of the best brokerage firms for options trading, with features, functionality, and brokerage rates.
  5. Options & Futures

    What is a volatility smile?

    Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence perplexes many investors and analysts.
  6. Options & Futures

    Apple As An Example Of How a Protective Collar Works

    We define a protective collar, using Apple (AAPL) as an example. A protective collar is a combination of a covered call plus long put position.
  7. Options & Futures

    Apple As An Example Of How to Use a Bull Call Spread to Trade

    Here's how you can use a bull call spread to trade stocks.
  8. Options & Futures

    Is short selling ethical?

    Understand the concept and practice of short selling, and examine the ethical questions that some investors raise in regard to this practice.
  9. Options & Futures

    What kinds of restrictions does the SEC put on short selling?

    Learn about the rules and regulations on short selling enforced by the U.S. Securities and Exchange Commission, or SEC, including the uptick rule.
  10. Options & Futures

    When short selling, how long should you hold on to a short?

    Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a short position.

You May Also Like

Hot Definitions
  1. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  2. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  5. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  6. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
Trading Center