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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References in periodicals archive ?
In addition to options to defer, expand, extend, contract, or abandon projects, there are also switching options; compound options, which are options on options; and rainbow options, which embody several types of uncertainty.
Case study: Developing a natural gas field (compound rainbow options)
Combinations of (compound) learning and rainbow options often arise.
For instance, "Compound options" are options on options--typically options at various stages in the life of a project; "rainbow options" are driven by multiple sources of uncertainty such as price of a unit of output, quantity that might be sold, and interest-rate variability; and "compound rainbow options" are options on options with multiple sources of uncertainty at each decision stage.
Compound rainbow options are the most complex real options but also the most realistic.