IDEAS home Printed from https://ideas.repec.org/a/spr/snbeco/v4y2024i8d10.1007_s43546-024-00694-7.html
   My bibliography  Save this article

Literature review: options and its applications

Author

Listed:
  • Amir Ahmad Dar

    (School of Chemical Engineering and Physical Sciences, Lovely Professional University)

  • Mohammad Shahfaraz Khan

    (University of Technology and Applied Sciences)

  • Imran Azad

    (University of Technology and Applied Sciences)

  • Amit Kumar Pathak

    (University of Technology and Applied Sciences)

  • Gopu Jayaraman

    (University of Technology and Applied Sciences)

Abstract

In particular, an option is a contract that confers the right, but not the commitment to buy a volume of the underlying asset in case of a call option and sell in case of the put option at a specified price on or before the expiry date. The practice of trading options dates back to ancient times, and the earliest documentation of option exchange can be traced back to historical texts such as the Bible. The beauty of the option is that an investor can make more profit from a small investment. Investments in options are made utilizing leverage, they are regularly used to enhance the profit of the portfolio greatly. This study is divided into two main sections: the initial part delves into the historical evolution of options and the models used to price them. In contrast, the subsequent section focuses on practical applications of options.

Suggested Citation

  • Amir Ahmad Dar & Mohammad Shahfaraz Khan & Imran Azad & Amit Kumar Pathak & Gopu Jayaraman, 2024. "Literature review: options and its applications," SN Business & Economics, Springer, vol. 4(8), pages 1-26, August.
    • Handle: RePEc:spr:snbeco:v:4:y:2024:i:8:d:10.1007_s43546-024-00694-7
    DOI: 10.1007/s43546-024-00694-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s43546-024-00694-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s43546-024-00694-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Manish Tewari & Pradipkumar Ramanlal, 2022. "Risk Management and Agency Theory: Role of the Put Option in Corporate Bonds," JRFM, MDPI, vol. 15(2), pages 1-28, January.
    2. Torben Andersen & Ilya Archakov & Leon Grund & Nikolaus Hautsch & Yifan Li & Sergey Nasekin & Ingmar Nolte & Manh Cuong Pham & Stephen Taylor & Viktor Todorov, 2021. "A Descriptive Study of High-Frequency Trade and Quote Option Data [Stealth Trading in Options Markets]," Journal of Financial Econometrics, Oxford University Press, vol. 19(1), pages 128-177.
    3. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
    4. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    5. Eduardo S. Schwartz & Mark Moon, 2000. "Rational Pricing of Internet Companies," Financial Analysts Journal, Taylor & Francis Journals, vol. 56(3), pages 62-75, May.
    6. Kulatilaka, Nalin & Marks, Stephen Gary, 1988. "The Strategic Value of Flexibility: Reducing the Ability to Compromise," American Economic Review, American Economic Association, vol. 78(3), pages 574-580, June.
    7. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    8. Capozza Dennis R. & Sick Gordon A., 1994. "The Risk Structure of Land Markets," Journal of Urban Economics, Elsevier, vol. 35(3), pages 297-319, May.
    9. Huimin Yao & Frederik Pretorius, 2014. "Demand Uncertainty, Development Timing and Leasehold Land Valuation: Empirical Testing of Real Options in Residential Real Estate Development," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 829-868, December.
    10. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-514, June.
    11. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
    12. Kee H. Chung & Charlie Charoenwong, 1991. "Investment Options, Assets in Place, and the Risk of Stocks," Financial Management, Financial Management Association, vol. 20(3), Fall.
    13. Honglin Wang & Fan Yu & Yinggang Zhou, 2020. "Property Investment and Rental Rate under Housing Price Uncertainty: A Real Options Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(2), pages 633-665, June.
    14. Quigg, Laura, 1993. "Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-640, June.
    15. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
    16. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. "Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-320, June.
    17. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    18. Rendleman, Richard J, Jr & Bartter, Brit J, 1979. "Two-State Option Pricing," Journal of Finance, American Finance Association, vol. 34(5), pages 1093-1110, December.
    19. Natter, Markus & Rohleder, Martin & Schulte, Dominik & Wilkens, Marco, 2016. "The benefits of option use by mutual funds," Journal of Financial Intermediation, Elsevier, vol. 26(C), pages 142-168.
    20. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    2. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    3. Carlos Andrés Zapata Quimbayo, 2020. "OPCIONES REALES Una guía teórico-práctica para la valoración de inversiones bajo incertidumbre mediante modelos en tiempo discreto y simulación de Monte Carlo," Books, Universidad Externado de Colombia, Facultad de Finanzas, Gobierno y Relaciones Internacionales, number 138, April.
    4. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    5. d’Amato, Maurizio & Zrobek, Sabina & Renigier Bilozor, Malgorzata & Walacik, Marek & Mercadante, Giuseppe, 2019. "Valuing the effect of the change of zoning on underdeveloped land using fuzzy real option approach," Land Use Policy, Elsevier, vol. 86(C), pages 365-374.
    6. Rocha, Katia & Salles, Luciana & Garcia, Francisco Augusto Alcaraz & Sardinha, Jose A. & Teixeira, Jose P., 2007. "Real estate and real options -- A case study," Emerging Markets Review, Elsevier, vol. 8(1), pages 67-79, March.
    7. Siddiqui, Afzal S. & Marnay, Chris & Wiser, Ryan H., 2007. "Real options valuation of US federal renewable energy research, development, demonstration, and deployment," Energy Policy, Elsevier, vol. 35(1), pages 265-279, January.
    8. Miao, Jianjun & Wang, Neng, 2007. "Investment, consumption, and hedging under incomplete markets," Journal of Financial Economics, Elsevier, vol. 86(3), pages 608-642, December.
    9. Renigier-Biłozor Małgorzata & d’Amato Maurizio, 2017. "The Valuation of Hope Value for Real Estate Development," Real Estate Management and Valuation, Sciendo, vol. 25(2), pages 91-101, June.
    10. Manuel Moreno & Javier Navas, 2003. "On the Robustness of Least-Squares Monte Carlo (LSM) for Pricing American Derivatives," Review of Derivatives Research, Springer, vol. 6(2), pages 107-128, May.
    11. Mark Broadie & Jérôme Detemple, 1996. "Recent Advances in Numerical Methods for Pricing Derivative Securities," CIRANO Working Papers 96s-17, CIRANO.
    12. Huimin Yao & Frederik Pretorius, 2014. "Demand Uncertainty, Development Timing and Leasehold Land Valuation: Empirical Testing of Real Options in Residential Real Estate Development," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 829-868, December.
    13. Felipe Isaza Cuervo & Sergio Botero Boterob, 2014. "Aplicación de las opciones reales en la toma de decisiones en los mercados de electricidad," Estudios Gerenciales, Universidad Icesi, November.
    14. Jan Vlachý, 2009. "Solving the Capacity Optimization Problem under Demand Uncertainty," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 12(34), pages 97-116, (4).
    15. Chi-Yo Huang & Hong-Ling Hsieh & Hueiling Chen, 2020. "Evaluating the Investment Projects of Spinal Medical Device Firms Using the Real Option and DANP-mV Based MCDM Methods," IJERPH, MDPI, vol. 17(9), pages 1-41, May.
    16. Collan, Mikael, 2004. "Giga-Investments: Modelling the Valuation of Very Large Industrial Real Investments," MPRA Paper 4328, University Library of Munich, Germany.
    17. Jan Vlachý, 2009. "Strategie podniku a finanční teorie [Corporate strategy and financial theory]," Politická ekonomie, Prague University of Economics and Business, vol. 2009(2), pages 147-162.
    18. Engstrom, Malin & Norden, Lars, 2000. "The early exercise premium in American put option prices," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 461-479, December.
    19. Madlener, Reinhard & Stoverink, Simon, 2012. "Power plant investments in the Turkish electricity sector: A real options approach taking into account market liberalization," Applied Energy, Elsevier, vol. 97(C), pages 124-134.
    20. In oon Kim & Bong-Gyu Jang & Kyeong Tae Kim, 2013. "A simple iterative method for the valuation of American options," Quantitative Finance, Taylor & Francis Journals, vol. 13(6), pages 885-895, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:snbeco:v:4:y:2024:i:8:d:10.1007_s43546-024-00694-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.