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 choosing the red-green over the rainbow option following the 2007 National Assembly election, Ieuan and Plaid showed that personal ambition was a lesser motive to our mission statement to act in the best interests of Wales.
Dithering Lib-Dems found no gold at the end of their rainbow option but Plaid were enticed towards coalition with the promise of a referendum within four years to add muscle to Assembly powers.
The coalition plans were approved by rank-and-file Lib-Dems days later but by then Rhodri Morgan was First Minister and much of the momentum behind the rainbow option had gone.
But even if Labour say yes, Plaid can very easily say no this afternoon, and restart talks on the rainbow option all over again.
It could effectively kill off Mr Morgan by deciding to offer the rainbow option for endorsement by the membership.
Carmarthen East and Dinefwr MP Adam Price, who was the lead policy negotiator for Plaid Cymru on the rainbow option and the main author of the document that would have formed the joint Plaid/Tory/Liberal Democrat programme for government, said, "I must say that a huge amount of work was put into the negotiations by Jenny Randerson [representing the Liberal Democrats] and David Melding [for the Conservatives].
The Plaid Assembly group votes to suspend talks with Labour in favour of the rainbow option. Four Plaid AMs dissent, led by Helen Mary Jones.
Plaid voted to go for the rainbow option, but four AMs dissented, led from the left by Helen Mary Jones.
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.