Lecture 12

Question 1

What are the advantages of real options?

Answer 1

• Allows the analysis of “optimal timing” of a corporate decision.
• Acknowledge the flexibility of managers’ decisions
• The potential use of an asset is considered in valuing the asset.

Question 2

How are real options related to financial options?

Answer 2

• Exercise an investment option = exercise a call option
• Exercise an abandonment option = exercise a put option