Real options valuation


The real options approach is an extension of financial options theory. The investment opportunities can be considered as corporate real options, which are integral for corporate resource allocation and planning. The value of flexibility of an investment project is basically a collection of real options, which can be valued with the techniques estimated for financial options. Basically, there are three main types of options associated with investment projects are: the option to postpone or delay, the option to expand, and the option to abandon. Option to expand and option to delay are valued as call option while option to abandon are valued as put option. Decision tree analysis can be used as a basic framework ...

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