Correlation options, also known as multifactor options generate profit conditioned by prices of at least two base assets. Those assets may be in the same or different class for example shares bonds, currencies or commodities. Correlation options became important thank to the financial market globalisation. International markets integration led to significant growth of foreign investment volume; correlation options became an important instrument for hedging and speculation on foreign markets.

Correlation options may be divided into two groups: first-order and second-order correlation options. First-order correlation options are based on more than one base instrument and their prices are directly depended on base assets correlation ratio. The most important first-order correlation exotic option are: basket options, portfolio options, exchange options, options on best/worst of n assets and cash, options on the maximum or minimum of n assets, spread options, ratio options, outperformance options and multi-strike options.

Second-order correlation options are based on one basic instrument, but the options are settled in two currencies, which demand to take under consideration the rate of exchange as a second variable. Correlation between exchange rate and base instrument has a great impact on option price and it has to be included during valuation. The main kinds of second-order correlation exotic options are: flexo, beach, quanto and compo.