Real option valuation methods – Black–Scholes models
AbstractReal option valuation methods used in firm valuation process allow taking into consideration firm’s flexibility and its adaptability to environmental changes. The risk is taken into consideration at an expected rate of return in real option – an expected return rate is related to CAPM model. Similarly to return rate of stocks, an expected rate of return µ = ? + ? in real option valuation process. Dividend rate in real option valuation could be interpreted as the cost of delay in project starting (an income that is refused in exchange of the possibility of rejecting a given option). The Black–Scholes model describes the pricing of European call option for share without dividend payment. A standard deviation of yearly return rate of stocks is a risk measure in Black–Scholes model. It is assumed that the variability of stocks is constant during the year. Actually, the variability is changing with time. So, in the paper, it is shown that the variability of stocks at WSE is changing with time and for this reason a short term variability should be taken into account in real option valuation process, i.e., the last 90–180 days. Other models based on the Black–Scholes one that refuse its basic assumptions are also presented.
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Bibliographic InfoArticle provided by Wroclaw University of Technology, Institute of Organization and Management in its journal Operations Research and Decisions.
Volume (Year): 1 (2005)
Issue (Month): ()
real options; Black–Scholes models; value of the firm;
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- Pindyck, Robert S, 1991.
"Irreversibility, Uncertainty, and Investment,"
Journal of Economic Literature,
American Economic Association, vol. 29(3), pages 1110-48, September.
- Robert S. Pindyck, 1991. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
- Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
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