Basket Option

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Definition: Basket Option

Basket Option

Full Definition of Basket Option

A basket option is an option whose payoff is linked to a portfolio or “basket” of underlier values. The basket can be any weighted sum of underlier values so long as the weights are all positive. Basket options are usually cash-settled. A call option on France’s CAC 40 stock index is an example of a basket option.

Basket options are popular for hedging foreign exchange risk. A corporation with multiple currency exposures can hedge the combined exposure less expensively by purchasing a basket option than by purchasing options on each currency individually.

Basket options are often priced by treating the basket’s value as a single underlier and applying standard option pricing formulas. An error is introduced by the fact that a weighted sum of lognormal random variables in not lognormal, but this is generally modest.

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Modern Language Association (MLA):
Basket Option. Payroll & Accounting Heaven Ltd.
January 19, 2022
Chicago Manual of Style (CMS):
Basket Option. Payroll & Accounting Heaven Ltd. (accessed: January 19, 2022).
American Psychological Association (APA):
Basket Option. Retrieved January 19, 2022
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Definition Sources

Definitions for Basket Option are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 28th December, 2021 | 4 Views.