GLOSSARY
Abandonment option: The option to cease a project prior to the end of its useful life and to recover the project’s salvage value.
American option: An option that can be exercised at any time on or before the expiration date.
Arbitrage opportunity: A market situation in which an asset is priced differently in two markets such that an investor can buy the asset in one market at one price and sell it for a higher price in the other market, thereby capturing the difference in the prices and incurring no risk.
Binomial model: A model for valuing options in which only two possible outcomes or states are associated with the underlying asset for each period of time.
Binomial tree: A graphical representation of a binomial model showing the possible outcomes or states associated with an option and its underlying asset.
Black–Scholes model: A model for pricing options in which the value of an option depends on the value of the underlying asset, the time to expiration of the option, the exercise price, the volatility of the underlying asset, and the risk-free rate or time value of money.
Call option: An option to buy a particular asset at a specified price within a specified period of time.
Compound option: An option to buy or sell an option. That is, the underlying asset of the option is another option.
Decision tree: A graphical representation of decisions and uncertainties over time for an investment project.
Deferral option: The option to invest in an investment project at a later ...
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