A Pragmatic Guide to Real Options by T. Arnold

By T. Arnold

Aimed at practitioners with no previous services within the subject, this book helps readers build easy actual techniques versions to help in decision-making. Providing a pragmatic and informative method, the authors introduce simple likelihood theories, before placing those theories right into a real-world context.

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Sample text

The short position’s value decreases possibly to a loss if the option is in-the-money and exercised. In real option analysis, determining whether the real option is similar to a call or a put is not of real importance except for understanding the academic literature concerning real option analysis. , pay the strike price to buy the underlying security/opportunity that has a spot price higher than the strike price). A real option is similar to 36 A Pr agmatic Guide to Real Op tions a put option if money can be received by selling an opportunity at a prespecified price when the value of the opportunity is below the prespecified price.

Often, the square root of the variance is taken as a similar measure for determining how good of a predictor the mean is of future events. 005 The variance and the standard deviation measure “risk” or “uncertainty” about the mean as a predictor of the future. Some will consider risk and uncertainty to be different, but such a difference is not an issue in this text. Just as the mean or expected value is critical for determining the value of a real option, the risk (generally measured as a standard deviation) will also play a role in determining the value of a real option.

4). 7 24 A Pr agmatic Guide to Real Op tions a very unsatisfactory measure of how “incorrect” the mean is relative to actual outcomes. , square the deviation from mean) before calculating the mean. ” The larger the variance, the more suspect the mean as a predictor of future events. Often, the square root of the variance is taken as a similar measure for determining how good of a predictor the mean is of future events. 005 The variance and the standard deviation measure “risk” or “uncertainty” about the mean as a predictor of the future.

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