An exotic option whose payout (payoff) depends on the overall performance of more than one underlying asset, as opposed to a standard vanilla option which typically involves a single underlying asset. In this sense, a two-asset option is a special case of a multi-asset option, where the number of underlying assets is limited to two, and hence the option is said to be two dimensional.
A prime example of a multi-asset option is a cross-currency option that entails the exchange of more than two currencies against a base currency. The option buyer purchases the right to receive designated currencies in exchange for a base currency, either at a preset exchange rate or at the prevailing foreign exchange rate. Another example is an option on a basket of stocks. A basket call option may be based on three stocks. If the value of the overall set of stocks is above the strike price, it would be better for the option’s holder to buy all the stocks in the basket.
In general, multi-asset options can be classified as American multi-asset options (multi-asset American options) and European multi-asset options (multi-asset European options). For a European multi-asset option, there are three broad categories: rainbow options, basket options, and quanto options.
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