Conventional option pricing models (e.g. [Black-Scholes Option Pricing]]) to value real options are most applicable when:
* There is notion of a ''replicating portfolio'' that drives option pricing models, where
** The underlying asset is traded - this yield not only observable prices and volatility as inputs to option pricing models but allows for the possibility of creating replicating portfolios
** An active marketplace exists for the option itself.
** The cost of exercising the option is known with some degree of certainty.

Note these conditions seldom exist in an company situation!

When option pricing models are used to value real assets, we have to accept the fact that
* The value estimates that emerge will be far more imprecise.
* The value can deviate much more dramatically from market price because of the difficulty of arbitrage
bag
finance_public
created
Fri, 13 Jan 2012 18:06:24 GMT
creator
dirkjan
modified
Fri, 13 Jan 2012 18:06:24 GMT
modifier
dirkjan
tags
M13
Real Options
creator
dirkjan