The notion of ‘real options’ applies option pricing theory to non-financial assets. The complexity of modelling investments as options has meant that, to date, options literature has had relatively little impact on management practices. This article examines recent attempts to find an optimum methodology for evaluating real options; with the plethora of alternative evaluative models that have encumbered the debate on real options, is it any wonder that management is cautious? A convergence of approaches to arrive at a ‘manager-friendly’ valuation method may be at hand.
Get full access to this article
View all access options for this article.
References
1.
AmramM., and KulatilakaN. (1999), Real Options: Managing Strategic Investment in an Uncertain World, Boston, MA: Harvard Business School Press.
2.
AmramM., and KulatilakaN. (2000), ‘Strategy and Shareholder Value Creation: The Real Options Frontier,’Journal of Applied Corporate Finance, Vol. 15, Number 2, pp. 15–28.
3.
BlackF., and ScholesM. (1973), ‘Application of Options and Corporate Liabilities’, Journal of Political Economy, 81, pp. 637–654.
4.
BorisonA. (2005), Journal of Applied Corporate Finance, Volume 17, Number 2, Morgan Stanley, Spring.
5.
CheungJ. K. (1993), ‘Managerial Flexibility in Capital Investment Decisions: Insight from the Real Options Literature’, Journal of Accounting Literature, Vol. 12, pp. 29–66.
6.
CopelandT., and AntikarovV. (2001), Real Options: A Practitioner's Guide, New York: TEXERE.
7.
CopelandT. E., and AntikarovV. (2005), ‘Real Options: Meeting the Georgetown Challenge’, Journal of Applied Corporate Finance, Vol. 17, Number 2, Morgan Stanley, Spring, pp. 32–51.
8.
DixitA., and PindyckR. (1994), Investment under Uncertainty, Princeton, NJ: Princeton University Press.
9.
FavatoG., MillsR. W., and WeinsteinW. L. (2005), ‘Real Options and Managerial Utility’, Unpublished Paper, Henley Centre for Value Improvement (HCVI).
10.
LuehrmanT. (1997), ‘What's It Worth? A General Manager's Guide to Valuation,’Harvard Business Review, May-June, pp. 132–142.
11.
LuehrmanT. (1998), ‘Investment Opportunities as Real Options: Getting Started on the Numbers,’Harvard Business Review, July-August, pp. 3–15.
12.
LuehrmanT. (1998), ‘Strategy as a Portfolio of Real Options,’Harvard Business Review, September-October, pp. 89–99.
13.
SmithJ., and NauR. (1995), ‘Valuing Risky Projects: Option Pricing Theory and Decision Analysis,’Management Science, Vol. 41, No. 5, pp. 795–816.
14.
SmithJ., and McCardleK. (1998), ‘Valuing Oil Properties: Integrating Option Pricing and Decision Analysis Approaches,’Operations Research, Vol. 46, No. 2, pp. 198–217.
15.
RussoJ.E., and ShoemakerJ.P.H. (1989), Decision Traps, Fireside Edition: New York.
16.
TrigeorgisL., MicalizziA., and FavatoG. (1997), The Eli Lilly Case, EGEA SDA Bocconi.
17.
VilligerR., and BogdanB. (2005), Nature Biotechnology, Volume 23, Number 4, April.
