Basket options

Basket options

Packages that involve the exchange of more than two currencies against a base currency at expiration. The basket option buyer purchases the right, but not the obligation, to receive designated currencies in exchange for a base currency, either at the prevailing foreign exchange market rate or at a prearranged rate of exchange. Multinational corporations with multicurrency cash flows frequently use basket options because it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each of the currencies that make up the basket.

Basket Option

An option contract in which the underlying asset consists of several different assets. For example, a basket call may give one the right, but not the obligation, to buy more than one currency at the strike price (which is denominated in a currency other than any in the underlying). A basket option provides a way for a corporation to hedge against several different risks at the same time and to do so more cheaply. However, a rainbow option is exposed to the risk that only some, rather than all, of the underlying assets will move in the direction benefiting the holder. A basket option is also called a rainbow option.
References in periodicals archive ?
Other gift basket options include premium baskets meant to impress, and goodie baskets meant to be shared with the entire office.
The hotel is offering three picnic basket options, and services of an Andaz Picnic Host to arrange a perfect picnic.
Vanmaele, 2004, Pricing of Arithmetic Basket Options by Conditioning, Insurance: Mathematics and Economics, 34: 55-77.
Posner, 1998a, A Closed-Form Approximation for Valuing Basket Options, Journal of Derivatives, 5(4): 54-61.
Posner, 1998b, Erratum: A Closed-Form Approximation for Valuing Basket Options, Journal of Derivatives, 6(2): 83.
Hot & Spicy Fish is part of Captain D's new Summer Fish Fest promotion that features five different fish basket options, each served in a lunch-size combo with fries, hushpuppies and a 22-ounce drink for just $3.
Her idea of plain vanilla includes complicated multi-currency basket options whose price depends on volatilities and correlations of all the currencies in the basket, and other financial engineering inventions that look plain only to quants comfortable with long equations full of Greek letters.
Other newly added models include FX Basket Models with Dupire, Bates, or Local Stochastic Volatility Models for individual equities, enabling greater flexibility for users when choosing pricing models--whether for hedging multi-currency exposures or for diversifying risk by purchasing Basket options.
INTEREST, a spreadsheet add-in for interest rate derivatives SPAV, a spreadsheet add-in for basket options
Future targeted enhancements will include additional models such as pre-paid forwards, basket options, and variance swaps.