Basket Option

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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.
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Compound rainbow options are the most complex real options but also the most realistic.