Basket option

rdf:langString Basket option

rdf:langString A basket option is a financial derivative, more specifically an exotic option, whose underlying is a weighted sum or average of different assets that have been grouped together in a basket. A basket option is similar to an index option, where a number of stocks have been grouped together in an index and the option is based on the price of the index, but differs in that the members and weightings of an index can change over time while those in a basket option do not. Unlike a rainbow option which considers a group of assets but ultimately pays out on the level of one, a basket option is written on a basket of underlying assets but will pay out on a weighted average gain of the basket as a whole. Like rainbow options basket options are most commonly written on a basket of equity indices, though they are frequently written on a basket of individual equities as well. For example, a call option could be written on a basket of ten healthcare stocks, where the basket was composed of ten stocks in weighted proportions. The strike price Xbasket is usually set at the current value of the basket (at-the-money), and the payoff profile will be max(Sbasket − Xbasket, 0) where Sbasket is a weighted average of n asset prices at maturity, and each weight represents the percentage of total investment in that asset.