Real Options

What are Real Options?

In finance, These are actual or real options (other than derivatives) that an investor may undertake to certain business initiatives. Investment decisions can be optioned like:

  • The option to invest
  • There is no need to exercise option now – Can we wait for more information?
  • The option to reject the option due to uncertain output from the project

The real options make a project more attractive because NPV method does not consider flexibility regarding options associated with the investment project.

Types

1- The Abandonment Option

2- Wait and See Option

3- The Option to Invest

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