Real Option Analysis versus DCF Valuation - An Application to a Tunisian Oilfield

Real Options Analysis versus Traditional DCF Valuation in Layman’s Terms

A fuzzy approach to real option valuation

To have a real option means to have the possibility for a certain period to either choose for or against making an invetsment decision, without binding oneself up front. The real option rule is that one should invest today only if the net present value is high enough to compensate for giving up the value of the option to wait. Because the option to invest loses its value when the investment is ...

A General Decision-Tree Approach to Real Option Valuation

The common paradigm for risk-neutral real-option pricing is a special case encompassed within our general model for valuing investment opportunities. Risk-neutral real option prices deviate from the risk-averse real option values that apply in an incomplete market, giving different rankings of investment opportunities and different optimal exercise strategies. Unlike risk-neutral prices, more g...

Sensitivity Analysis for Cash Flow Simulation Based Real Option Valuation

Sensitivity analysis identifies the critical aspects of the investment model that affect model output uncertainty. Common sensitivity analysis on options considers how the solution changes as a result of change in one of the key parameters (underlying asset value, volatility, exercise price, interest rate, time to maturity, dividends). In case of cash flow simulation based real options, these a...

Using Binomial Decision Trees to Solve Real-Option Valuation Problems

T decision analysis methods can provide an intuitive approach to valuing projects with managerial flexibility or real options. The discrete-time approach to real-option valuation has typically been implemented in the finance literature using a binomial lattice framework. Instead, we use a binomial decision tree with risk-neutral probabilities to approximate the uncertainty associated with the c...