Real Options

Introduction. What are the real options. Common real options? Call and put options. Determinants of option value. Comparison with standard capital budgeting techniques. Discounted cash flow. Net present value. Internal rate of return. Basic valuation models. The black and scholes model. Binomial model. Finite difference model. Conclusions. Bibliography.

A real option itself is the right - but not the obligation - to undertake some business decision. There is a growing gap between how the market is pricing some businesses and the values generated by traditional valuation models. Real options - a relatively new analytical tool - bridge this gap between hard numbers and intuition. The real options approach applies financial option theory - the best known form is the black-scholes model - to real investments, such as manufacturing plants, line extensions. Real options are particularly important for businesses with a few key characteristics. The first is smart and reputable management with access to capital. Managers must understand options, identify and create them, and appropriately exercise them. This contrasts with business leaders focused on maintaining the status quo or maximizing near-term accounting earnings. Finally, real options are most applicable precisely where change is most evident. A common objection to real option analysis is that option pricing models require certain assumptions that are not met in real asset markets. The real options approach has been suggested as a capital budgeting and strategic decision-making tool because it explicitly accounts for the value of future flexibility.

In our research we seek to find out the significance of real options and to exclude the main parts of them. First of all, we describe what the real options are, write the most common real options, discuss about call and put options, and represent the basic determinants of option value. In the second part we talk about real options comparison with standard capital budgeting techniques such as, discounted cash flow analysis, net present value and internal rate of return. Finally, in the last part we analyze the main valuation methods: the black scholes, binomial, and finite difference methods. In our report there are not only theoretic, but also practical examples, based on written and visual material. In the end of this job we produce conclusions and bibliography.

  • Microsoft Word 106 KB
  • 2011 m.
  • 27 puslapiai (7599 žodžiai)
  • Universitetas
  • Monika
  • Real Options
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Real Options. (2011 m. Vasario 15 d.). Peržiūrėta 2021 m. Kovo 01 d. 05:49
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