Financial Engineering

A Basket option is one with a payoff dependent on a basket of underlying index levels, instead of a single underlier. The basket level is the sum of the respective index levels multiplied by appropriate weighting factors, and the option payoff is computed with respect to the basket level. For example, one might purchase a European call option on a basket of common equities.

To one extreme, one might even argue that an option on an index is a basket option, but the usual usage of the term refers to a group of 2-10 underliers.

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