Basket Options: Basics

A basket option is an exotic option whose payoff depends on the weighted average of the prices in an underlying basket or portfolio. We briefly look at the history of basket options, and then explore the reasons behind the popularity of basket options. There are a wide variety of basket options, and we discuss two of these types, callable basket options, and Asian call options, in detail. To finish, we demonstrate the use of these two types of basket option with examples.