Question

How important is it that an organization have an exclusive right to exercise a real option? That is, can we really say that an option being considered has value if competitors may exercise it also?

Answer 1

How important is it that an organization have an exclusive right to exercise a real option? That is, can we really say that an option being considered has value if competitors may exercise it also?

First let us understand what is a real option.

Real Option : Before learning what is a real option, we'll understand what is an option is. An Option provides the buyer a right to purchase or make a sale for a specified quantity of an underlying asset within a fixed price before or at the date of the same option. A Real Option is embedded within this option. Real option gives you an advantage of contingency in the case of exclusivity since this has the effect on company's growth and efficiency in profitability.

There are again some features where the management can make flexible decision with the real options namely option to wait, option to invest and option to divest making the market information put to use. NPV is the most traditional method to evaluate the real options pricing.

Now, how important is it that an organization have an exclusive right to exercise a real option?... Well, by the investment and divestment programs introduced in each of the project could be exercised as a real option and this exclusivity and right is authorized by the organization in order to add the benefits of investing in a project and deduce the loss making project by divesting. At times, the project may take a downside risk but if waited, could lead to profitable future, there the company has an exclusive right to exercise the option to wait.

Can we really say that an option being considered has value if competitors may exercise it also? .. To answer this, each competitor has his own strategy, pricing decision and an understanding of the market moves. The payoff is completely dependent on what type of investment/divestment are they into and this drives the rivals to make decisions.It's all about making a right investment option on right time with right strategy, failing to make one can lead into the rival's success. Thus there's a possibility of choosing the right model for the project whether to divest, wait or to invest with respect to the competitors may result success even when competitors exercise the same or adopting different methods.