While option-pricing models are a superior valuation tool – the purpose to which the theory is generally put – real options can provide a systematic framework that will also serve as a strategic tool, and that it is in this strategic application that the real power of real options lies.
It is just such a framework that this article seeks to provide. We begin by developing the parallels between financial options and real options. We go on to demonstrate the power of real-option valuation as compared with traditional NPV analysis. A real option confers certain reactive flexibilities on its holder – essentially, the option to invest, wait, or divest in response to new information. Its sensitivity to the value of these possibilities is what makes a real option a better valuation tool than NPV .
However, we believe insufficient attention has been paid to the way in which the determinants of option value identify proactive flexibilities – the flexibility to take action in ways that will enhance the value of an option once acquired. Accordingly, we show how the real-options framework helps you identify and prioritize the key levers you can pull to increase the option payoff.
- Get Real About Real Options
[Archive.org URL] - Keith J. Leslie, Max P. Michaels [Archive.org URL]
- Project Analysis? Climb the Decision Tree [Archive.org URL]
- Real Options = Real Value [Archive.org URL]
- Real Options: Valuing Flexibility in Strategic Investments [Archive.org URL]
- Reality Check for Real Options [Archive.org URL]
- Thinking in Real (Options) Time [Archive.org URL]
- Visible Options [Archive.org URL]
- Will Real Options Take Root? [Archive.org URL]
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