A guarantee gives the right, but not the obligation, to exploit it under certain circumstances. Anyone who buys or is given a guarantee thus holds a kind of option. The same is true of an insurance contract. The method developed by this year s laureates can therefore be used to value guarantees and insurance contracts. One can thus view insurance companies and the option market as competitors.
Investment decisions constitute another application.
Many investments in equipment can be designed to allow more or less flexibility in their utilization. Flexibility can be viewed as an option. To choose the best investment, it is therefore essential to value flexibility in a correct way. Banks and investment banks regularly use the laureates methodology to value new financial instruments and to offer instruments tailored to their customers specific risks. At the same time such institutions can reduce their own risk exposure in financial markets.