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What Exactly Is An "option"?  
User currently offlineEGBJ From United Kingdom, joined Jan 2007, 498 posts, RR: 4
Posted (6 years 12 months 4 hours ago) and read 2234 times:

Hi all,

Whilst I get the general idea of what an "option" is i've never understood the details...could someone please explain. Also, what is a "purchase right"...and while we're at it could someone also explain what exactly a "Memorandum of Understanding" and "Letter of Intent" is please.

I did a search...to no avail. If a thread already exists on these topics could somebody please direct me to it.

Thanks for any info,
Rich  Smile

5 replies: All unread, jump to last
 
User currently offlinePHLstudent From United States of America, joined May 2006, 498 posts, RR: 7
Reply 1, posted (6 years 12 months 4 hours ago) and read 2205 times:

There are some pretty decent descriptions of memorandum of understanding and letter of intent on wikipedia.

http://en.wikipedia.org/wiki/Memorandum_of_Understanding

http://en.wikipedia.org/wiki/Letter_of_intent


User currently offlineEGBJ From United Kingdom, joined Jan 2007, 498 posts, RR: 4
Reply 2, posted (6 years 12 months 4 hours ago) and read 2171 times:

So am I right in thinking an MoU is virtually the same as a LoI and that they are effectively agreements between two parties. How do they differ from a conventional contract? Wiki says they indicate "an intended common line of action, rather than a legal commitment"...what exactly does that mean?

Thanks again
Rich  Smile


User currently offlineSrbmod From , joined Dec 1969, posts, RR:
Reply 3, posted (6 years 12 months 4 hours ago) and read 2163 times:

An option is basically an agreement to purchase an a/c at a certain price if the airline (or leasing company) exercises any options. The price for the options is locked in. Say ABC Airways orders 25 a/c from a manufacturer at $50 million a piece. As part of the deal, they also agreed to 25 options, for which they would pay the previously agreed upon $50 million price. This can be beneficial for the airline (or leasing company) if the price for a brand new a/c goes up. Let's say that 2 years down the road, ABC Airways decides to exercise 15 of the 25 options. The manufacturer is now selling that a/c for $65 million each due to demand for the a/c. ABC Airways won't be spending $65 million for those 15 a/c; they'll be paying $50 million each.

From what I can gather "purchase right" is just another term for an option.


User currently offlineEGBJ From United Kingdom, joined Jan 2007, 498 posts, RR: 4
Reply 4, posted (6 years 12 months 4 hours ago) and read 2132 times:

Thanks Srbmod...that makes sense. A few more questions though. Do options expire?...if so when and also is there a limit to how many options a carrier can place at any one time. Furthermore...what advantage does the whole idea of options have to the manufacturer?

 Smile


User currently offlineMoo From Falkland Islands, joined May 2007, 3875 posts, RR: 5
Reply 5, posted (6 years 12 months 3 hours ago) and read 2107 times:

Options can also secure extra production slots on a manufacturing line, although this is not normal - essentially if a deal is good enough, the manufacturer could agree to guaranteed production slots on the line which allows for the carrier to 'buy now, pay later' in more ways that one (finance, purchase agreements with shareholders et al).

Quoting EGBJ (Reply 4):
Do options expire?...if so when and also is there a limit to how many options a carrier can place at any one time.

Options do expire, but 'when' depends on the negotiations between the carrier and the manufacturer, as well as how many.

Quoting EGBJ (Reply 4):
Furthermore...what advantage does the whole idea of options have to the manufacturer?

They have the potential of selling more during a period, and as that period expires they can approach option holding airlines and press them for a decision without any difficult negotiation.

Essentially an option is an 'almost sold' aircraft - all it takes is an option holder to say yes, no negotiation involved.


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