Real option


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Real option

An option or option-like feature embedded in a real investment opportunity.

Real Option

A situation in which an investor is able to choose between two different investments where both choices involve tangible assets. That is, in a real option, the investor may choose between assets like land or inventory; financial instruments like stocks and bonds are not involved in a real option. It should be noted that a real option has nothing to do with an option contract.
References in periodicals archive ?
explains how the use of a financial tool called the real option valuation model can be used to evaluate choices for major weapons systems, despite the lack of monetary-based benefits.
Real estate presents several opportunities to employ real option valuation theories, including real estate purchase options, development and acquisition feasibility, bankruptcy, abandonment, and litigation.
Scots star Lorraine said: "I'm delighted to support Pedal On UK which celebrates how far we have come to make walking and cycling a real option for people of all ages and abilities to get around their communities.
A real option is the right (but not the obligation) to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project.
Trigeorgis (1993) was among the first to study the implications of interdependence and to establish the non-additivity of real option values.
Specifically, the first real option is a growth option, which is the right to make additional investments if the initial investment is successful.
The worry is, Everton's financial state is such that the only real option available is a loan move or a free transfer gamble.
Transport Minister Norman Baker said: "We know there is public appetite out there for plug-in vehicles and as government we're doing everything possible to make them a real option for both motorists and industry.
The real option method enables corporate decision-makers to leverage uncertainty and limit downside risk (Mun, 2006).
The real option approach is applied utilizing the same criteria as above while Monte Carlo simulation was used to determine the mean and the variance of net annual returns of the project.
He was also interested in better understanding how and why real option valuation models are generally considered more complex than DCF models.
This model uses the real option valuation approach and determines the flexibility value or the option premium, which is the maximum amount of money that the tenant is willing to invest in incorporating a specific flexible feature in the leasing arrangement.