The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd


  • Robert C. Merton
Reference work entry


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.


Arbitrage 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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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Robert C. Merton
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