Real Options Theory

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  • The application of option pricing theory that is used to evaluate call and put options in order to evaluate investments in real assets, such as acquisition of plant, equipment, and other fixed assets. Whereas call and put options pricing deals with pricing financial assets, real options theory deals with strategic decision making in investment in real assets—plant, equipment, land, and buildings—by applying call and put options pricing models to capital budgeting techniques. Capital budgeting is the application of financial techniques to evaluate investments in projects and products that increase the value of the firm. These techniques will lead to an accept or reject decision of whether to undertake the project

    A call or put option is the right and not the obligation to buy or sell ...

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