Are Real Options “Real”? Isolating Uncertainty from Risk in Real Options Analysis

Leh-chyan So ()

MPRA Paper from University Library of Munich, Germany

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. (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:52493

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