Real option

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 ?
What is replacing it is a wide array of non-standard contracts, all of which provide the firm with a real option. That real option gives the firm the right, but not the obligation, to flexibly adjust and optimally time the use of its worker's human capital assets.
"No-deal is not a real option and the Government has not seriously prepared for it."
Speaking on Canal+ show Au Tableau, he told how he met with then-Arsenal manager Arsene Wenger, admitting a move to north London was a "real option".
In his congratulation statement to the nation and President Saleh al-Sammad, the president of the Supreme Political Council, Chief al-Houthi said :"The best option to prevent destruction and chaos to the homeland is by adopting the peaceful transfer of power, as a real option." The country marks the first anniversary of peaceful transfer of power, one year after the power was peacefully and in a democracy way transferred from the Supreme Revolutionary Committee to the Supreme Political Council.
If the decision can be altered without cost, the real option has no value.
The real option approach is not widely used in business practice, despite the advice given in the academic literature to incorporate it in the assessment of a project.
Recently, with considerable researches in this field, real option approach (ROA), which is firstly brought up by Myers and Turnbull [2] and Ross [3], has been generally accepted as an appropriate method to help make decisions of metal mineral resources mining under uncertain circumstances.
In contrast to the traditional approach that uses expected cash-flows to value investment projects, the real option approach takes into account the entire distribution of cash-flows, allowing the firm to react/respond during the course of the investment.
In addition to these three approaches, the real option approach has become the latest (Boer 2004).