歡迎登陸 Real Options Valuation 網站
Real Option Valuation Introduction:
The Real Option Valuation template encompasses a suite of option pricing tools to quantify the embedded strategic value for a range of proposed or existing investment scenarios.
Traditional discounted 歡迎登陸 Real Options Valuation 網站 歡迎登陸 Real Options Valuation 網站 cash flow investment analysis will only accept an investment if the returns on the project exceed the hurdle rate. While this is a worthwhile exercise, it fails to consider the myriad of strategic options that are associated with many investments. This template provides the ability to identify what options might exist in your proposal and the tools to estimate the quantification of them.
Real Option Valuation Features:
- Ease and flexibility of input, with embedded help prompts.
- Informative 'Quick Start' menu for choosing the correct tool for the situation.
- Modified Black Scholes models to value the options to delay, expand, or abandon investments.
- Automatic binomial 'tree' builder model to evaluate 歡迎登陸 Real Options Valuation 網站 complex strategic options with multiple stages.
- Nash 歡迎登陸 Real Options Valuation 網站 equilibrium Game Theory model to evaluate market entry strategies in a competitive environment.
- Ability to predefine historical investment and/or industry risk profiles to utilize across models.
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Real options 歡迎登陸 Real Options Valuation 網站 are a right but not an obligation to 歡迎登陸 Real Options Valuation 網站 make a business decision. The concept of a real option is crucial to the success of a business as the ability to choose the right business opportunity bears a significant effect on the company’s profitability and growth. A real option allows the management team to analyze and evaluate business opportunities and choose the right one.
The concept 歡迎登陸 Real Options Valuation 網站 of real options is based on the concept of financial options; thus, fundamental knowledge of financial options is crucial to understanding real options.
Types of Real Options
Real options may be classified into different groups. The most common types are: option to expand, option to abandon, option to wait, option to switch, and option to contract.
- Option to expand is the option to make an investment or undertake a project in the future to 歡迎登陸 Real Options Valuation 網站 expand the business operations (a fast food chain considers opening new restaurants).
- Option to abandon is the option to cease a project or 歡迎登陸 Real Options Valuation 網站 an asset to realize its salvage value (a manufacturer can opt to sell old equipment).
- Option to wait is the option of deferring the 歡迎登陸 Real Options Valuation 網站 business decision to the future (a fast food chain considers opening new restaurants this year or 歡迎登陸 Real Options Valuation 網站 in the next year).
- Option to contract 歡迎登陸 Real Options Valuation 網站 is the option to shut down a project at some point in the future if conditions are unfavorable (a multinational corporation can stop the operations of its branches in a country with an unstable political situation).
- Option to switch is the option to shut down a project at some point in the future if the conditions are unfavorable and resume it when the conditions are favorable (an oil company can shut down the operation of one of its plants when oil prices are low and resume operation when prices are high).
Pricing of Real Options
The NPV method is the most straightforward approach to real options pricing. For example, for an option to expand the business operation, we can forecast the future cash flows of this project and discount them to 歡迎登陸 Real Options Valuation 網站 the present value at the opportunity cost. We will use the option if the NPV is positive and dismiss it if the NPV is negative. However, in a real-life setting, the NPV approach can be hard to perform correctly.
Fortunately, the pricing of financial options approaches can be applied 歡迎登陸 Real Options Valuation 網站 to price the real options. Some real options behave similarly to calls; some behave similarly to puts. As for example, the option to expand can be viewed as a call option, while the option to abandon can be viewed as a put option.
In order to use the techniques for pricing financial options for real options, we should define the relevant variables.
|Symbol||Financial Option||Real Option|
|S||Stock price||Expenditure required to acquire asset/Upfront investment|
|K||Strike price||Current value of asset/project|
|T||Time to maturity||Time before the opportunity expires|
|σ||Volatility||Riskiness of asset/project|
|r||Risk-free rate||Interest rate|
|Div.||Dividends||Cash flows from operations|
Using the variables above, we can easily use the methods used for pricing financial options such as binomial model, Black-Scholes model, and Monte Carlo simulation to price real options.
Thank you for reading CFI’s explanation of Real Options. To 歡迎登陸 Real Options Valuation 網站 keep learning and advancing your career, the 歡迎登陸 Real Options Valuation 網站 following resources will be helpful:
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