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25 Years Real Options Approach to Investment Valuation: Review and Assessment

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Real Options

Part of the book series: ZfB-Ergänzungshefte ((ZFB))

Abstract

During recent years, real options have emerged as one of the most actively researched topics in finance and related fields. A quarter of a century since the first appearence of the term, this article sets out to review the main contributions to real options theory and assess their impact on our understanding of managerial behavior in an environment characterized by economic uncertainty and flexibility. Next to the option pricing foundations, the article emphasizes the role of real options for the extraction and commercialization of natural resources, research and development, corporate risk management and foreign direct investment, production flexibilities, as well as game-theoretic treatments of corporate investment decisions. In addition, the authors discuss reasons for the reluctance of corporate practitioners to employ real option analysis in their capital budgeting decisions and ways in which the underlying concerns have been addressed in the literature so far.

This paper is based on a presentation by U. Hommel held at the Conference on “Recent Topics in Real Option Valuation” at the Donau-Universität Krems (Austria) in July 2002. The authors would like to thank two anonymous referees and the editors for helpful comments, while retaining responsibility for all remaining errors and omissions.

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Baecker, P.N., Hommel, U. (2004). 25 Years Real Options Approach to Investment Valuation: Review and Assessment. In: Dangl, T., Kopel, M., Kürsten, W. (eds) Real Options. ZfB-Ergänzungshefte. Gabler Verlag, Wiesbaden. https://doi.org/10.1007/978-3-663-12338-5_1

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