Real Option

Real options their types characteristics. Real options valuation

Content

    It deals with the importance of recognizing flexibility in capital investments, and how traditional ways of valuing investments have largely neglected the benefits of flexibility in the presence of uncertainty and irreversibility.

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    Flexibility in investment decision making can limit the downside potential of an investment while exploiting its upside potential. In its asymmetric structure, it is shown that flexibility possesses option-like features that allow for interpreting managerial flexibility as options on real assets which can be valued using option pricing methods well known in financial markets. The resulting additional value introduced by flexibility can be operationalized by the notion of expanded net present value, which covers the sources of value coming from the static project without flexibility and the value of all relevant managerial real options.

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