This term paper will start with providing an introduction to real options. Here the term itself will be explained, classified and compared to financial options. Subsequent it will be described where real options can be found and some popular examples will be explained. In the following Chapter the valuation of real options will be discussed. Approaches from the capital budgeting perspective as well as approaches from the option price modelling perspective are analysed, compared to each other and evaluated.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Real options overview
- Classification of real options
- Types of real options
- Real options valuation
- Net present value approach
- Decision tree approach
- Binominal model
- Black-Scholes Option Pricing model
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to introduce the concept of real options, a valuable tool for evaluating investment projects beyond traditional discounted cash flow (DCF) methods. It explores the classification of real options, distinguishes them from financial options, and delves into common types like the option to expand, defer, or abandon a project. The paper further examines different valuation approaches for real options, comparing and evaluating methods like net present value (NPV), decision tree analysis, the binomial model, and the Black-Scholes option pricing model.
- The concept and definition of real options
- The relationship between real options and financial options
- Different types of real options and their applications in investment decision-making
- Valuation approaches for real options, including NPV, decision tree analysis, and option pricing models
- The importance of incorporating flexibility and opportunity cost in project valuation
Zusammenfassung der Kapitel (Chapter Summaries)
- The introduction provides an overview of the main question in investment theory: whether an investment is worthwhile. It highlights the limitations of traditional DCF methods in capturing entrepreneurial flexibility and introduces real options as a means to account for these factors.
- Chapter 2 defines and classifies real options, distinguishing them from financial options. It explores various types of real options, including the option to expand, defer, or abandon a project, with illustrative examples.
- Chapter 3 focuses on the valuation of real options, discussing approaches from both the capital budgeting perspective and the option pricing model perspective. It compares and evaluates different methods such as NPV analysis, decision tree analysis, the binomial model, and the Black-Scholes option pricing model.
Schlüsselwörter (Keywords)
This paper focuses on the concept of real options, their classification, valuation, and application in investment decision-making. Key topics include investment theory, discounted cash flow (DCF), net present value (NPV), entrepreneurial flexibility, financial options, option pricing models, decision tree analysis, the binomial model, and the Black-Scholes option pricing model.
- Quote paper
- Philipp Rothe (Author), 2022, Real Options and Investments. Theoretical approach and applications, Munich, GRIN Verlag, https://www.grin.com/document/1357317
