Exit Option

AAA

DEFINITION of 'Exit Option'

An embedded option within a project that allows the firm abort their operations at little or no cost. An exit option can typically only be exercised after key developments have occurred within the project. Like any other option, this instrument must be purchased at a cost which factors into the capital budgeting decision, but its value is not determined by the price of an underlying asset.

BREAKING DOWN 'Exit Option'

For example, if company XYZ decides to expand their number of operating factories by 10 over five years, an exit option would allow them to abort this operation despite contractual obligations with suppliers and land developers. If, after 2 years, expansion remains a good idea, XYZ can continue to do so. However, if economic conditions have changed, the exit option provides the opportunity to stop further efforts at no cost.

RELATED TERMS
  1. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  2. Expansion Option

    An embedded option that allows the firm which purchased the real ...
  3. Asian Option

    An option whose payoff depends on the average price of the underlying ...
  4. Barrier Option

    A type of option whose payoff depends on whether or not the underlying ...
  5. Capital Budgeting

    The process in which a business determines whether projects such ...
  6. Exotic Option

    An option that differs from common American or European options ...
Related Articles
  1. Investing Basics

    Pin Down Stock Price With Real Options

    How can you assign a value to what a company may do with its business in the future? We explain how it works.
  2. Options & Futures

    Using Options Instead Of Equity

    Learn how to multiply returns and diversify risk by buying options instead of stock.
  3. Options & Futures

    Make Better Options Trades With The Average Monthly Range

    We'll show you how to use the average monthly trading range to score better returns.
  4. Options & Futures

    What Is Option Moneyness?

    Get the basics under your cap before you get into the game.
  5. Fundamental Analysis

    Is India the Next Emerging Markets Superstar?

    With a shift towards manufacturing and services, India could be the next emerging market superstar. Here, we provide a detailed breakdown of its GDP.
  6. Term

    Estimating with Subjective Probability

    Subjective probability is someone’s estimation that an event will occur.
  7. Home & Auto

    When Getting a Rent-to-Own Car Makes Sense

    If your credit is bad, rent-to-own may be a better way to purchase a car than taking out a subprime loan – or it may not be. Get out your calculator.
  8. Investing Basics

    Understanding the Modigliani-Miller Theorem

    The Modigliani-Miller (M&M) theorem is used in financial and economic studies to analyze the value of a firm, such as a business or a corporation.
  9. Economics

    Explaining Kurtosis

    Kurtosis describes the distribution of data around an average.
  10. Investing Basics

    What's a Holding Company?

    A holding company is a corporation that owns enough voting stock in another company to control its management and policies.
RELATED FAQS
  1. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  2. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  3. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  4. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  5. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  6. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  2. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  3. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  4. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  5. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  6. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!