Options

Dirk Schoenmaker and Willem Schramade
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Willem Schramade: Nyenrode Business University

Chapter 19 in Corporate Finance for Long-Term Value, 2023, pp 579-622 from Springer

Abstract: Abstract Financial options are contracts that give the owner the right to buy (in the case of a call option) or sell (in the case of a put option) a security at a pre-specified price (the exercise price). The flexibility is on the side of the buyer, but the seller is compensated with a premium paid by the buyer. Sophisticated models have been developed to determine the value of options. Options are interesting since they offer an alternative way of tying payoffs to (future) situations, also outside of contractual settings. In that case, they are called real options. Real options come in various types, such as the option to delay, the option to expand, and the option to abandon. One can analyse many situations as combinations of options, and one can visualise them with decision trees and payoff graphs for a better intuitive grasp of situations. Real options on financial (F) factors can have environmental (E) or social (S) drivers: payoff in terms of F, but with E or S as the underlying values. There are also real options on E and S themselves, i.e. with the payoffs in terms of E and S, and possibly the underlying values as well. In fact, companies are short a lot of options against society, but awareness of it is low. The interactions between F, S, and E options call for an integrated view on options, which helps make these options and their trade-offs more explicit.

Keywords: American option; Ask price; Bid price; Binomial tree; Binomial option pricing model; Black-Scholes option pricing model; Call option; Decision tree; European option; Exercise price; Financial option; Implied volatility; In-the-money; Intrinsic value of an option; Long position; Open interest; Option premium; Option pricing model; Option to expand; Option to abandon; Option to delay; Option quotations; Option value; Out-of-the-money; Payoff graph; Payoff structure; Profit diagram; Put option; Put-call parity; Real option; Risk-free interest rate; Short position; Strike price; Sucker games; Time value of an option; Time to expiration; Underlying value; Value of flexibility; Volatility; Writing an option (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-031-35009-2_19

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DOI: 10.1007/978-3-031-35009-2_19

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