Abandonment option

Abandonment option

The option of terminating an investment earlier than originally planned.

Abandonment Option

A clause in some contracts allowing one party or the other to terminate the contract before completion. The abandonment option adds value to a contract that can be traded because it allows both parties a great deal of flexibility in case the contract proves unprofitable. However, the clause is most common in contracts between financial advisers and their clients.
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With an abandonment option, at every node at time t the optimal option price is computed as the maximum of the discounted expected price minus x, early exercise option price, and zero.
In this example, the value of the abandonment option is worth $641 at t = 0.
Panel B reports optimal purchase prices in the presence of the abandonment option.
The second type of real option is an abandonment option, which relates to the amount of spending on advertising.
Alternatively, if a movie's initial revenues fall below expectations, managers have the option to spend less on marketing it or exercising an abandonment option.
Typically, there are five basic types of managerial flexibility to be identified: deferral option, abandonment option, expansion option, contraction option, and switching option (9).
For the second case with the abandonment option just considered, the net value of the project also can be obtained: -$2.
Now we can ask whether operating a gas-powered car with such an abandonment option would be more valuable than operating a gas-powered car without this option.
Now we see that this abandonment option makes the gas-powered car more attractive by $300; i.
Real Options--American, European, Bermudan, and Customized Abandonment Options.
Real Options--Contraction, Expansion, and Abandonment Options.
The two most common options used in corporations are growth options and abandonment options.