Encyclopedia of Law and Economics

Living Edition
| Editors: Alain Marciano, Giovanni Battista Ramello

Option

  • Danny Cassimon
  • Peter-Jan Engelen
Living reference work entry
DOI: https://doi.org/10.1007/978-1-4614-7883-6_355-1

Definition

The right (but not the obligation) to buy or sell a certain asset at specific moments in time at a predetermined price

Introduction

An option is a financial instrument that gives its holder the right to buy or sell an underlying asset at a pre-agreed price at specific moments in time (Hull 2011). The first feature of an option contract is that it gives the holder the right to do something, but not the obligation (Bachelier 1900). If an option entitles to buy an asset, the option is referred to as a call option, while a put option is the right to sell an asset (Brennan and Schwartz 1977). The pre-agreed price at which the holder can buy or sell the asset is the strike price or the exercise price. The time to maturity is the time period which indicates when the holder can exercise the option. When an option is exercised during the entire period, it is commonly referred to as an American option, while a European option contract can be exercised only at the predetermined...

This is a preview of subscription content, log in to check access.

References

  1. Bachelier L (1900) Théorie de la spéculation. Gauthier-Villars, ParisGoogle Scholar
  2. Black F, Scholes M (1973) The pricing of options and corporate liabilities. J Polit Econ 81:637–659CrossRefGoogle Scholar
  3. Brennan M, Schwartz E (1977) The valuation of American put options. J Financ 32:449–462CrossRefGoogle Scholar
  4. Cassimon D, Engelen PJ (2015) Real options. In: Marciano A (ed) Encyclopedia of law and economics. Springer, New York, pp 1–10Google Scholar
  5. Cassimon D, Engelen PJ (2016) Option pricing models. In: Marciano A (ed) Encyclopedia of law and economics. Springer, New York, pp 1–6Google Scholar
  6. Cassimon D, Engelen PJ, Thomassen L, Van Wouwe M (2004) Valuing new drug applications using n-fold compound options. Res Policy 33:41–51CrossRefGoogle Scholar
  7. Cassimon D, Engelen PJ, Thomassen L, Van Wouwe M (2007) Closed-form valuation of American call-options with multiple dividends using n-fold compound option models. Finance Res Lett 4:33–48CrossRefGoogle Scholar
  8. Cox JC, Ross SA, Rubinstein M (1979) Option pricing: a simplified approach. J Financ Econ 7(3):229–263CrossRefGoogle Scholar
  9. Haug EG, Taleb NN (2011) Option traders use (very) sophisticated heuristics, never the black–Scholes–Merton formula. J Econ Behav Organ 77(2):97–106CrossRefGoogle Scholar
  10. Hull JC (2011) Options, futures, and other derivatives, 8th edn. Pearson, Upper Saddle RiverGoogle Scholar
  11. Jacque L (2015) Global derivative debacles. From theory to malpractice, 2nd edn. World Scientific Publishing, SingaporeCrossRefGoogle Scholar
  12. Merton RC (1973) Theory of rational option pricing. Bell J Econ Manag Sci 4:141–183CrossRefGoogle Scholar
  13. Van Liedekerke L, Cassimon D (2000) Derivatives: power without accountability. In: Van Liedekerke L (ed) Explorations in financial ethics. Peeters, Leuven, pp 107–151Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Institute of Development PolicyUniversity of AntwerpAntwerpenBelgium
  2. 2.School of EconomicsUtrecht UniversityUtrechtThe Netherlands
  3. 3.Faculty of Applied EconomicsUniversity of AntwerpAntwerpenBelgium