Real Options Theory
The concept introduces the Real options theory and presents methods and classes real options can be grouped into, and strengths and weaknesses of the theory.
Real Options Theory Definition
Real options theory refers to the “right, but not the obligation, to take different courses of action (for example defer, abandon and expand) with respect to real assets (for example an oil well, a new product or an acquisition) as opposed to an option on financial securities or commodities” (CIMA, 2005:95). The notion of real options is the “idea that one can view firms’ discretionary investment opportunities as a call option on real assets, in much the same way as a financial call option provides decision rights on financial assets” (Tong and Reuer, 2007:5).
Real Options Theory Description *
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Examples of Real Options Theory *
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Real Options Theory References (4 of up to 20) *
- Amram, M. and Kulatilaka, N. (1999) Real Options: Managing Strategic Investment in an Uncertain World. Harvard Business School Press, Boston, MA.
- Arnold, G. (2008) Corporate Financial Management. Pearson Education, Essex, UK.
- Bodie, Z. and Merton, R.C. (2000) Finance. Prentice Hall, Upper Saddle River, New Jersey.
- CIMA (2005) CIMA Official Terminology. The Chartered Institute of Management Accountants, Oxford, UK.
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