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Options

In: Corporate Finance for Long-Term Value

Author

Listed:
  • Dirk Schoenmaker

    (Erasmus University Rotterdam)

  • Willem Schramade

    (Nyenrode Business University)

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.

Suggested Citation

  • Dirk Schoenmaker & Willem Schramade, 2023. "Options," Springer Texts in Business and Economics, in: Corporate Finance for Long-Term Value, chapter 19, pages 579-622, Springer.
    • Handle: RePEc:spr:sptchp:978-3-031-35009-2_19
    DOI: 10.1007/978-3-031-35009-2_19
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