Basket Option
An exotic option whose payoff depends on the weighted performance of a basket of multiple underlyings rather than a single asset. Common in multi-asset structured products and currency-overlay hedges. The correlation between basket components becomes a load-bearing pricing input: lower correlations make the basket less volatile and reduce the option premium, while higher correlations make the basket behave more like a single asset and raise the premium. Correlation assumptions are typically less well-anchored than single-asset volatility assumptions, which is one reason basket-option pricing carries more model risk than vanilla pricing.
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Related terms
American Option · Asian Option · Barrier Option · Butterfly Spread · Calendar Spread · Cash-Secured Put
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