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Definition of real options

Real Options Image 1

real options

options embedded in real assets.



Related Terms:

After-tax real rate of return

Money after-tax rate of return minus the inflation rate.


approximated net realizable value at split-off allocation

a method of allocating joint cost to joint products using a
simulated net realizable value at the split-off point; approximated
value is computed as final sales price minus
incremental separate costs


Barrier options

Contracts with trigger points that, when crossed, automatically generate buying or selling of
other options. These are very exotic options.


Basket options

Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.


cafeteria plan a “menu” of fringe benefit options that include

cash or nontaxable benefits



Dealer options

Over-the-counter options, such as those offered by government and mortgage-backed
securities dealers.


Delivery options

The options available to the seller of an interest rate futures contract, including the quality
option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which
Treasury Bond will be delivered or when it will be delivered.


Real Options Image 2

Equity options

Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.


Exchange Rate, Real

The nominal exchange rate corrected for price level differences.


Exit Options

A variety of options available to an investor to recover their invested capital and the return on their investment.


Interest Rate, Real

Nominal interest rate less expected inflation.


Margin requirement (Options)

The amount of cash an uncovered (naked) option writer is required to
deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.


Net Realizable Value

Selling price of an asset less expenses of bringing the asset into a saleable state and expenses of the sale.


net realizable value approach

a method of accounting for by-products or scrap that requires that the net realizable value of these products be treated as a reduction in the cost of the primary products; primary product cost may be reduced by decreasing either
(1) cost of goods sold when the joint products are sold or
(2) the joint process cost allocated to the joint products


net realizable value at split-off allocation

a method of allocating joint cost to joint products that uses, as the proration base, sales value at split-off minus all costs necessary
to prepare and dispose of the products; it requires
that all joint products be salable at the split-off point


Net realizeable value

The expected revenue to be gained from the sale of an item or
service, less the costs of the sale transaction.


Real Options Image 3

Options contract

A contract that, in exchange for the option price, gives the option buyer the right, but not
the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a
specified time period, or on a specified date (expiration date).


Options contract multiple

A constant, set at $100, which when multiplied by the cash index value gives the
dollar value of the stock index underlying an option. That is, dollar value of the underlying stock index = cash
index value x $100 (the options contract multiple).



Options on physicals

Interest rate options written on fixed-income securities, as opposed to those written on
interest rate futures contracts.


Real

Measured in base year, or constant, dollars. Contrast with nominal.


Real Actions (Earnings) Management

Involves operational steps and not simply acceleration
or delay in the recognition of revenue or expenses. The delay or acceleration of shipment would
be an example.


Real assets

Identifiable assets, such as buildings, equipment, patents, and trademarks, as distinguished from a
financial obligation.


real assets

Assets used to produce goods and services.


Real Business Cycle Theory

Belief that business cycles arise from real shocks to the economy, such as technology advances and natural resource discoveries, and have little to do with monetary policy.


Real capital

Wealth that can be represented in financial terms, such as savings account balances, financial
securities, and real estate.


Real cash flow

A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash
flow is given.


Real Exchange Rate

Exchange rate adjusted for relative price levels.


Real Options Image 4

Real exchange rates

Exchange rates that have been adjusted for the inflation differential between two countries.



Real GDP

GDP expressed in base-year dollars, calculated by dividing nominal GDP by a price index.


Real Income

Income expressed in base-year dollars, calculated by dividing nominal income by a price index.


Real interest rate

The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms
of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate
adjusted for inflation.


Real Interest Rate

The rate of interest paid on an investment adjusted for inflation


real interest rate

Rate at which the purchasing power of an investment increases.


Real market

The bid and offer prices at which a dealer could do "size." Quotes in the brokers market may
reflect not the real market, but pictures painted by dealers playing trading games.


real microprofit center

a center whose output has a market value


Real Money Supply

Money supply expressed in base-year dollars, calculated by dividing the money supply by a price index.


Real Rate of Interest

See interest rate, real.


Real time

A real time stock or bond quote is one that states a security's most recent offer to sell or bid (buy).
A delayed quote shows the same bid and ask prices 15 minutes and sometimes 20 minutes after a trade takes place.


real value of $1

Purchasing power–adjusted value of a dollar.


Real Wage

Wage expressed in base-year dollars, calculated by dividing the money wage by a price index.


Realizable Revenue A revenue transaction where assets received in exchange for goods and

services are readily convertible into known amounts of cash or claims to cash.


Realized compound yield

Yield assuming that coupon payments are invested at the going market interest
rate at the time of their receipt and rolled over until the bond matures.


Realized Gains and Losses

Increases or decreases in the fair value of an asset or a liability that
are realized through sale or settlement.


Realized return

The return that is actually earned over a given time period.


Realized Revenue

A revenue transaction where goods and services are exchanged for cash or
claims to cash.


realized value approach

a method of accounting for byproducts or scrap that does not recognize any value for these products until they are sold; the value recognized
upon sale can be treated as other revenue or other income


REIT (real estate investment trust)

real estate investment trust, which is similar to a closed-end mutual
fund. REITs invest in real estate or loans secured by real estate and issue shares in such investments.


REMIC (real estate mortgage investment conduit)

A pass-through tax entity that can hold mortgages
secured by any type of real property and issue multiple classes of ownership interests to investors in the form
of pass-through certificates, bonds, or other legal forms. A financing vehicle created under the Tax Reform
Act of 1986.



 

 

 

 

 

 

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