Valuing Real Options: Can Risk-Adjusted Discounting Be Made To Work?
This paper examines three alternative approaches to valuing real options: (1) the standard option pricing technique using "risk-neutral" probabilities; (2) the use of risk-adjusted discount rates; and (3) discounting certainty-equivalent values with a riskless discount rate. As suggested by the title, a question of particular interest is whether an approach based on risk-adjusted discount rates can be "made to work" for valuing options. The answer is yes. Indeed, the authors show that any of the three approaches will provide a correct valuation if properly employed. 2001 Morgan Stanley.
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Volume (Year): 14 (2001)
Issue (Month): 2 ()
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