Are Real Options “Real”? Isolating Uncertainty from Risk in Real Options Analysis

So, Leh-chyan (2013): Are Real Options “Real”? Isolating Uncertainty from Risk in Real Options Analysis. Forthcoming in: Annals of Financial Economics

Abstract

This paper derives an adjusted Black-Scholes pricing formula. In separating risk and uncertainty using the robust control technique, we find that both uncertainty and risk raise management’s subjective evaluation of real options. We suggest a simple method to filter the risk of the project and to acquire a more reliable value of real options without the influence of uncertainty. In addition, we propose that an investment opportunity may be postponed inappropriately, as under uncertainty the exercise of investment may be delayed by the project manager. To our knowledge, any similar quantitative methods have not hitherto been mentioned in terms of isolating uncertainty from risk in real options analysis that we consider here.

• Item Type: MPRA Paper
• Language: English
• Keywords: Option to defer, investment opportunity, uncertainty, Black-Scholes pricing formula, volatility.
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

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