Abstract
This chapter offers a comparison of the real options valuation approach, using the contingent claims approach, to two traditional valuation methods. The first traditional valuation approach discussed in this chapter is the NPV analysis, which also includes the contingent claims approach and the second is the decision tree analysis. Through this comparative study, it is shown when real options provide better results than traditional approaches. This will be illustrated on the basis of Copeland and Antikarov (2001) and these examples are further elaborated by the use of other literature.
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Notes
- 1.
This probability represents a real-world probability measure to obtain the upstate and downstate volatilities. This is in contrast to the risk-neutral probability, which is used for risk-neutral real option-pricing. In case of risk-neutral probabilities, cash flows are adjusted in such a way that these are discounted at the risk-free rate instead of the WACC.
References
Copeland T, Antikarov V (2001) Real options a practitioners guide. TEXERE, New York/London
Schwartz ES, Trigeorgis L (eds) (2001) Real options and investment under uncertainty classical readings and recent contributions. The MIT Press, Cambridge/London
Van Putten AB, MacMillan IC (2004) Making real options really work. Harv Bus Rev 82(12):134
Wang A, Halal W (2010) Comparison of real asset valuation models: a literature review. Int J Bus Manage 5(5):14–24
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Peters, L. (2016). Comparison of Real Options Analysis and Other Methods. In: Real Options Illustrated. SpringerBriefs in Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-28310-4_2
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DOI: https://doi.org/10.1007/978-3-319-28310-4_2
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