Markets

Examples of options

Examples of options in corporate finance include:

1. Share warrants, giving the holder the option to buy shares directly from the company at a fixed exercise price for a given period of time.
2. Convertible Joan stock, giving the holder a combination of a straight loan or bond and a call option. On exercising the option, the holder exchanges the loan in exchange for a fixed number of shares in the company.
3. Loan stock can have a call option attached giving the company the right to repurchase the stock before maturity.
4. Executive share option schemes are share options issued to company executives as incentives to pursue shareholder goals.
5. Insurance and loan guarantees are a form of put option. An insurance claim is the exercise of an option. Government loan guarantees are a form of insurance. The government, in effect, provides a put option to the holders of risky bonds so that, if the borrowers default, the bond holders can exercise their option by seeking reimbursement from the government. Underwriting a share issue is a similar type of option.
6. Abandonment Option at times it may be desirable to abandon a project, even though its economic life is not over. Recognition of this possibility may enhance the project’s expected return and make it less risky than it would be if abandonment value were ignored. Abandonment facility is like a put option.
7. Timing Option. Management may have the option of investment now or waiting for, say, another one year to gain valuable information about a new project before investing. The decision can be viewed as a form of call option.