![]() ![]() Uncertainty: Lack of knowledge of the future behavior of an event due to the lack of information on the variables that will affect that event. Real Option: Extrapolation of the definition the financial option to non-financial assets.įinancial Option: It is a contract where one of the parties has the right but not the obligation to buy (call option) or sell (put option) an asset at a strike at a certain period of the time to the other party. Investment Project: Possibility of the companies for carry out different investment and possibilities of decision making.īinomial Model: Valuation model based on the binomial distribution where a value can take two different scenarios, one rising and the other falling. The use of this option modality is very interesting when the uncertainty is very high and the cash flows that are postponed or lost due to waiting are very small (Ingersoll and Ross, 1992). The exercise price corresponds to the value of the investment at the future time. Like financial options, the company has a right, but not an obligation, to carry out an investment project within a specific time horizon. This allows the company to obtain more information on the evolution of the variables that affect the project. The book shows that the assumption of a constant interest rate in real options valuation is not justifiable. The option to defer an investment project grants the right to postpone its completion within a specified time horizon. Interest rates for real options valuation are simulated by using stochastic term structure models (Vasicek, Cox-Ingersoll-Ross, Ho-Lee, and Hull-White one-factor and two-factor models) and by using implied forward rates. ![]()
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