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A Pragmatic Guide to Real OptionsOption Terminology and an Introduction to Binomial Trees

A Pragmatic Guide to Real Options: Option Terminology and an Introduction to Binomial Trees [In the first two chapters it was pointed out how limiting net present value (NPV) analysis can be and how making project decisions sequentially allows for better decision-making even though the risk of the project does not change. Each one of these decisions made through the lifetime of a project is a “real option” or simply an “option.” In this chapter, option terminology is introduced based on traded financial options. Understanding option terminology will help with reading the academic literature on real options. However, trying to describe a decision point as a specific type of option is really not necessary. Understanding when there is a crucial decision point and what factors should be considered in making the decision is more important than labeling the decision as this “type” of option. Consequently, as option terminology is being introduced, it will be put in the context of a traded financial option and within the context of a real option.] http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png

A Pragmatic Guide to Real OptionsOption Terminology and an Introduction to Binomial Trees

Arnold, Tom
Springer Journals — Nov 12, 2015
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19 pages

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Publisher
Palgrave Macmillan US
Copyright
© Palgrave Macmillan, a division of Nature America Inc. 2014
ISBN
978-1-349-48301-3
Pages
33 –52
DOI
10.1057/9781137391162_3
Publisher site
See Chapter on Publisher Site

Abstract

[In the first two chapters it was pointed out how limiting net present value (NPV) analysis can be and how making project decisions sequentially allows for better decision-making even though the risk of the project does not change. Each one of these decisions made through the lifetime of a project is a “real option” or simply an “option.” In this chapter, option terminology is introduced based on traded financial options. Understanding option terminology will help with reading the academic literature on real options. However, trying to describe a decision point as a specific type of option is really not necessary. Understanding when there is a crucial decision point and what factors should be considered in making the decision is more important than labeling the decision as this “type” of option. Consequently, as option terminology is being introduced, it will be put in the context of a traded financial option and within the context of a real option.]

Published: Nov 12, 2015

Keywords: Real Option; Call Option; Strike Price; Return Volatility; Underlying Asset

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