Institute of Development Policy and Management
Dordrecht :Springer, 2015
Encyclopedia of law and economics / Backhaus, J. [edit.]
University of Antwerp
When (real sector) investment projects are characterized by a substantial degree of uncertainty and irreversibility, and carry some flexibility in the timing of execution, they are conceptually analogous to financial options. As such, the concepts and valuation models developed in the financial options literature can also be applied to characterize and value these real option investment projects. As such, after having shown this analogy between financial and real options in detail, we review the main types of real options, discuss the main valuation models developed in the literature and discuss ways in which to identify and estimate the different types of risk, as a proxy for uncertainties involved in the project.