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Confuse with example of call/put option in real life

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Confuse with example of call/put option in real life

  • This topic has 1 reply, 2 voices, and was last updated 2 years ago by John Moffat.
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  • November 11, 2023 at 6:15 am #694659
    harry1094
    Participant
    • Topics: 29
    • Replies: 46
    • ☆☆

    Dear Tutor,

    When revising this paper, I am wondering with 1 example in real life and don’t know whether it is the call or put option.

    Initial offer: Company X has an agreement with Government to build 2,500 miles of highway across the country during 5 years.
    Revised offer: Company X offers to build 1,500 miles of highway in urban area at first, and have the option to build remaining 1,000 miles of highway in the next 4 years.

    My question here is that option to build remaining 1,000 miles of highway is call or put option, and why?

    My initial view is that build the highway, company X will receive money -> it is option to sell something because when completing the highway, company X will receive money. So it is the put option.

    However, on the other hand, I am wondering whether “underlying asset” is the “right to build the highway”, and company X has to pay money to buy this right. In this assumption, it is the call option.

    Because not being sure with both ways of thinking, I do not know what is right and what is wrong, so please help me clarify.

    November 12, 2023 at 7:58 am #694689
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54831
    • ☆☆☆☆☆

    It is an option to expand, and as such is a call option.

    Have you watched my free lectures on this where I explain the various scenarios?

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