What is Real Options Theory?

If you’re new to the concept of strategic management, you might be wondering: What is Real options theory? The answer might surprise you. This theory has captivated the minds of many investors. This article will help you understand this new concept better. It aims to make you a better investor and help you trade with confidence. You’ll discover what it is and why you need to apply it in your daily life. Then, you can start to reap the benefits of this new concept.

Real options theory is a branch of financial economics that deals with the optionality of investments. In other words, it looks at the potential for investments to be changed in ways that create value. For example, a company might have the option to expand its business into a new market. This option might create value if the company is able to enter the new market successfully. Real options theory helps companies to identify and capitalize on these types of opportunities.

The field of real options is still quite young. However, a number of influential scholars are writing on the subject. Professor Lenos Trigeorgis, for example, has been at the forefront of this new field for many years, and his articles and books are a key reference point. Other notable academics include Professor Michael Brennan, Eduardo Schwartz, and Han Smit. Professor Robert Pindyck is another pioneer in the field of real options.

The Black-Scholes-Merton model was first published in 1980. Since then, research on the model has expanded the range of options that can be valued. However, the underlying asset may not be clear. For instance, a newly released movie is not available on Bloomberg. Likewise, an untested drug is not yet available on the market. Nevertheless, the value of the drug can be estimated by looking at the performance of similar drugs. The use of this model has sparked a debate among critics.

In conclusion, real options theory is a valuable tool for businesses that want to make strategic decisions. It allows managers to weigh the risks and benefits of different options and make the best decision for their company. By understanding real options theory, businesses can maximize their profits and stay competitive in today’s global market.

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