Calculating Real Option Values
Published Online: 15 FEB 2011
Copyright © 2010 John Wiley & Sons, Inc. All rights reserved.
Wiley Encyclopedia of Operations Research and Management Science
How to Cite
Dias, M. A. G. 2011. Calculating Real Option Values. Wiley Encyclopedia of Operations Research and Management Science. .
- Published Online: 15 FEB 2011
This article presents an overview of real option methodologies for evaluation and decision on capital investments under uncertainty. These methodologies are based on one of the two fundamental ideas: the construction of a risk-free portfolio and the risk-neutral probability measure, both to calculate the present value of options using risk-free discount rate. The article discusses these ideas in discrete- and continuous-time approaches, with methods like binomial lattices, stochastic differential equations, integral method, and Monte Carlo simulation. The strengths and weakness of these methods are discussed in light of applications. The article discusses different types of real options as well as the combination of real options with other disciplines like game theory, decision analysis, and genetic algorithms.
- real options;
- investment under uncertainty;
- options pricing;
- value of flexibility