The Promise and Peril of Real Options Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 firstname.lastname@example.org.
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.