Option risk

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1. Banking.

Banks' lending and deposit-taking relationships with their customers often give valuable options to the customers, as part of the relationship.

For example, a customer's right to repay a fixed rate mortgage early.

'Option risk' is the risk to the bank which arises from the possibility that the customers might exercise their rights of this kind, to the disadvantage of the bank.

2. Risk management - real options.

More broadly, the risk to any organisation or individual that another market participant may exercise a real option, causing loss or inconvenience to the organisation or individual exposed to the option risk.

3. Risk management - financial options.

Any risk associated with a financial option, whether as the writer or the holder of the option.

See also