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 ?
In the assessment of real option valuation we use two basic methods: the Black Scholes model and the binomial model based on the decision tree analysis.
Specifically, the first real option is a growth option, which is the right to make additional investments if the initial investment is successful.
consider a variety of complex issues, namely affective management, scheduling algorithms, patent rights, the role of the Internet in managing business organizations, and strategic decision making with real option valuation models.
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.
Dr Ord, a 30-year-old research associate at Oxford's Future of Humanity Institute, said: "By standing together as a group, we hope to make others see giving this much is a real option.
Boeing's real option method provides technologists with investment and risk modeling tools and methods that can be incorporated alongside standard systems engineering design modeling techniques.
Management, math, engineering, economics, and other specialists from Europe, the US, and Chile address theoretical models of commodity storage and shipping, the performance of two models of the evolution of future prices of emission certificates, a method for optimization of the management of the real option to extract copper from a mine, real option analysis in the context of the merchant management of hydrocarbon cracking operations, and a model of the evolution of commodity prices used in real option analysis for optimizing the portfolio of contracts used by oil refineries to sell their gasoline production.