ARE REAL OPTIONS "REAL"? ISOLATING UNCERTAINTY FROM RISK IN REAL OPTIONS ANALYSIS

Leh-Chyan So ()
Additional contact information
Leh-Chyan So: Department of Quantitative Finance, National Tsing Hua University, Taiwan, 101, Section 2 Kuang Fu Road, Hsinchu, Taiwan

Annals of Financial Economics (AFE), 2014, vol. 09, issue 01, 1-18

Abstract: This paper derives an adjusted Black–Scholes pricing formula. In separating risk and uncertainty using the robust control technique, we find that both uncertainty and risk raise management's subjective evaluation of real options. We suggest a simple method to filter the risk of the project and to acquire a more reliable value of real options without the influence of uncertainty. In addition, we propose that an investment opportunity may be postponed inappropriately, as under uncertainty the exercise of investment may be delayed by the project manager. To our knowledge, any similar quantitative methods have not hitherto been mentioned in terms of isolating uncertainty from risk in real options analysis that we consider here.

Keywords: Option to defer; investment opportunity; uncertainty; Black–Scholes pricing formula; volatility; G11; G12; G13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010495214500018
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:afexxx:v:09:y:2014:i:01:n:s2010495214500018

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010495214500018

Access Statistics for this article

Annals of Financial Economics (AFE) is currently edited by Michael McAleer

More articles in Annals of Financial Economics (AFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().