in real options, required investment is considered the exercise price

The Promise and Peril of Real Options Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012

Applies to strategic, as well as financial options. Financial options impose no obligation to invest; therefore, investors are protected if the stock price falls below the exercise price. Latest Revision: December 30, 1999. • The cost of future investment required to capitalize on the R&D program (such as the cost of commercializing a new technology that is developed) can be considered the exercise price. A derivative is a financial instrument based on an underlying asset. "Exercise price" is a term used in derivatives trading. Identifying Real Options. The topic of real options applies the option valuation techniques to capital budgeting exercises in which a project is coupled with a put or call option. They have noted that these … Campbell R. Harvey, Fuqua School of Business, Duke University, Durham, NC National Bureau of Economic Research, Cambridge, MA. cost (exercise price), for a pre-determined period of time (time to expiration). Real-options strategies strive to incorporate this feature into real-market investments, minimizing managers’ obligations in … • The returns to the R&D investment are analogous to the value of a stock purchased with a call option. – Defer, expand, contract, abandon a project over time n NPV analysis underestimates project value !

Overview. 2 Abstract In recent years, practitioners and academics have made the argument that traditional discounted cash flow models do a poor job of capturing the value of the options embedded in many corporate actions.



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