An option whose value is determined by the performance of, and the correlation between, two or more financial prices. This is in contrast to regular options and path-dependent options, the values of which are determined by the performance of a single financial price. Multi-factor options are typically divided into three groups: quanto options, rainbow options, and basket options. Rainbow options can be further subdivided into better-of or worse-of options, outperformance options, and max/min options. Basket options are usually based on two or more underlying assets.
The concept of multi-factor options goes beyond that of multi-asset options, as the option performance is not limited to underlying assets, but can also be inclusive of other influential factors.
