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

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  • So, Leh-chyan

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.

Suggested Citation

  • So, Leh-chyan, 2013. "Are Real Options “Real”? Isolating Uncertainty from Risk in Real Options Analysis," MPRA Paper 52493, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:52493
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    File URL: https://mpra.ub.uni-muenchen.de/52493/1/MPRA_paper_52493.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Option to defer; investment opportunity; uncertainty; Black-Scholes pricing formula; volatility.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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