Basket Option

An option based on a group-or “basket”-of multiple underlying assets or currencies. The option’s value and payoff are determined by the combined performance of the entire basket, rather than a single currency or asset. 

For example, an exporter doing business in both Europe and Japan might use a basket option on EUR/USD and USD/JPY to hedge against fluctuations in both currencies at once. If the euro and yen move in opposite directions, the basket smooths out the effect. 

Basket Options are useful for managing diversified currency exposures in a single instrument. They are often found in structured products and are closely related to Currency Overlay strategies and Synthetic Strategies, where multiple tools are combined for customized hedging.