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Real options valuation books11/19/2022 The purpose of a real option is to explore the potential of a product or new technology. Contrary to financial investments, in technology investment situations, the price of an underlying asset is hard to know, and the underlying asset cannot be traded easily. However, investments in technology differ from those in financial assets in terms of priceability and tradability of the underlying asset. So, what is initially a negative NPV would become a positive NPV once the project’s option value is incorporated. This value would be added to the NPV analysis. If you plug all these values into the Black–Scholes option-pricing model, you would get a positive value (do not forget all options have a positive value). The most popular is the Black–Scholes option-pricing model where the option value is determined by five input values of the exercise price of an option, the time to exercise date, the current price of the asset, the variance per period of rate of return on asset, and the risk-free rate of interest. For financial investments, option-pricing techniques are heavily used to take into account the flexibility issue. They are called real options because they are investments in tangible assets, products, processes, and services rather than financial instruments such as stocks. is a decision or choice to invest a little or a lot in a product, a technology, or a project. 14.3 The Role of Real Options in Investment DecisionsĪ real option A decision or choice to invest a little or a lot in tangible assets, products, processes, technologies, and services rather than financial instruments such as stocks.
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