Real Option Pricing in Mixed-use Development Projects

Robert Fourt, Gianluca Marcato () and Charles Ward
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Robert Fourt: GeraldEve

Real Estate & Planning Working Papers from Henley Business School, University of Reading

Abstract: The application of real options theory to commercial real estate has developed rapidly during the last 15 Years. In particular, several pricing models have been applied to value real options embedded in development projects. In this study we use a case study of a mixed use development scheme and identify the major implied and explicit real options available to the developer. We offer the perspective of a real market application by exploring different binomial models and the associated methods of estimating the crucial parameter of volatility. We include simple binomial lattices, quadranomial lattices and demonstrate the sensitivity of the results to the choice of inputs and method.

Pages: 31 pages
Date: 2007
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Working Paper: Real Option Pricing in Mixed-use Development Projects (2007)
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