Real Options and Stochastic Control

Abstract

The aim of this chapter is to derive a modelling framework for valuing projects with multiple incorporated real options. The motivation of such efforts is clear. A decision maker is usually not interested in just a value of a single option but rather in the influence of a certain option on the value of the whole project. But since option values are in most cases not additive, one has to explicitly take account of the contingency structure of the incorporated real options in order to find the fair value of the project.¹It is therefore important to find a framework which allows in a stringent way to value projects in the presence of option interactions. Furthermore, such a modelling framework should have the necessary generality to deal with many different problems where sometimes completely different options are present.