Intel uses option contracts for the right to purchase key pieces of equipment at a specific future date.They simulate the likelihood that they will need to purchase a specific piece of equipment and then create the options contracts to reduce risk and potentially save money.

Question

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Intel has figured out a way to limit the risk it faces by using option contracts. Intel pays an up-front fee for the right to purchase key pieces of equipment at a specific future date. At that point, Intel either purchases the equipment or releases the supplier from the contract. In these cases, the supplier is then free to sell the equipment to someone else. Where there is significant uncertainty about the need for equipment, they use the simulation results to identify the specific equipment for which they need option contracts and the value of those options to Intel. This helps with the pricing.

Intel Uses Option Contracts for the Right to Purchase Key