Risk glossary

 

Real option

A non-traded asset or liability whose profit-and-loss sensitivity to a commodity price or other market variable mimics that of an option contract. Extracting oil from an oilfield is a classic example of a real option. If oil prices remain low, the field can be left dormant at no additional cost. If oil prices rise sufficiently, the profits earned on the sale of the oil will more than outweigh the costs of extraction.

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