An option is a security whose owner has a right to buy (sell) it at a specified price on a specified date (or, with an American-type option, on or before the specified date). Trading of options on common stock began in 1973 and has since spread to other commodities. Option pricing theory provides a unified theory for the pricing of corporate liabilities. Of its more recent extensions, perhaps the most significant is its application in the evaluation of operating or ‘real’ options in the capital budgeting decision problem.
KeywordsArbitrage Bachelier, L. Black, F. Capital budgeting Deposit insurance Forward contracts Futures contracts Government loan guarantees Ito’s lemma Merton, R. C. Option pricing theory Options Pension fund insurance Probability Scholes, M.
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