Real option analysis plays a major role in the corporate finance sector. This analysis is used for implementing the methods of call and put option rating and taking the long term decisions of investing money in expansion projects related to research and growth of the company and many more.
A real option offers the businessman with the flexibility of taking a business decision according to his or her opinion.
The option guarantees the right to the option-holder of deciding on several factors like capital investment and many more. On the other hand, the flexibility lies in the fact that the option-holder is not bound to take the decisions because he or she has no additional obligation for holding the option.
Generally, real options are used by a single owner and these options cannot be traded. Now, if an investment is made for the purpose of establishing a new unit of a firm or to develop the existing ventures then that investment decision is considered as real option. In such cases, the proprietor of the firm has no position to sell the right to perform the activities of expansion. At the same time, there are several real options that can be traded or can be termed as transferable. There are some other real options also that can be performed by a group of people.
The activity of investment in the business is an age-old practice. However, the term real option has been introduced recently. In the recent times, the investment activities of business sector have developed a lot and the sector has started to think more consciously about the investments. Analysis of every factor is done before conforming the investment decision. Now, these new processes of conforming an investment decision are related to the term, real option.
The real option analysis is also used to get a measure of the uncertainties that are related to the process of making investments and then the risk-adjustment is done where it is necessary. At the same time, the businessmen are compelled by the real option analysis to remain denotative for their assumptions that are related to the projects.
Last Updated on : 27th June 2013