Question

How are the investment attributes that make it possible to characterize subjectively the value of a real option related to the attractiveness of an industry? For example, when the threat of entry into an industry is high, are real options likely to be more or less valuable? When the level of rivalry in an industry is high, are real options likely to be more or less valuable?  

Answer 1

Real option valuation (ROV), also known as real choice analysis, applies the option evaluation technique to budget decisions. The real choice itself is the right but not the obligation to undertake specific business initiatives, such as delays, cancellations, expansion, or negotiation of capital projects. For example, the opportunity to invest in expanding a company's plant or, alternatively, selling a plant is a call-or-run option, respectively.

Actual options often differ from conventional financial options in that they are usually not traded and usually do not involve decisions on underlying assets that are traded as financial security. Another difference is the holder of choice here, namely. Management, can directly affect the critical design value of this option; Whereas this is not a consideration of the basic guarantee of financial options. In addition, management cannot measure volatility uncertainty and, on the other hand, should rely on their perception of uncertainty. Unlike financial options, management must also make or explore tangible options, and the process of making and discovering them involves entrepreneurial or business affairs. Real options are most valuable when uncertainty is high; Management has considerable flexibility to change the course of the project in a favorable direction and ready to use the opportunity.

The analysis of practical choices as a discipline extends from its application in corporate finance to general uncertainty decision making, adapting techniques developed for financial choices to real life decisions. For example, R&D managers may use practical options assessments to help them deal with uncertainties when deciding on resource allocation among R&D projects. For example, a non-business may be the decision to join the workforce or sacrifice years of income to attend college. In this way, it forces you to make strong decisions about assumptions based on their predictions, and for this reason, ROV is increasingly being used as a tool in developing business strategies. Extending alternative options to real-world projects often requires a decision support system, because otherwise complex real-world options will not be easy to solve.