Real Option And Applications In Investment

Proceedings of The 5th International Conference on Opportunities and Challenges in Management, Economics and Accounting

Year: 2019


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Real Option And Applications In Investment

Necmiye AKYURT



Traditional valuation methods used in valuation of investment projects may be inadequate on their own in uncertain environments. In order to overcome these shortcomings, the real option method has been developed by changing the concept of financial option which has been used for nearly 40 years.The real option method, which has been used for about 25 years, is used on an investment project and not on any financial asset. As it is known, financial options give the holder the right to buy or sell a certain financial asset at a determined price from today. Since real options are related to investment projects, their amounts are higher than those of financial options. However, the maturity of financial options is shorter than that of real options.In the valuation of real options, financial option pricing models can be used, the most widely used being the Black & Scholes model. The real option value of the project calculated according to the model created is different from the value of the project calculated according to the traditional method, and we can conclude that the same project which has been valued according to the traditional methods and which has to be rejected should be accepted according to the real option method.Accordingly, the use of real option valuation method as well as traditional methods in project appraisal will put decision makers in front of different results under uncertainty and help them make investment decisions more accurately.The purpose of this research is to investigate whether real options offer different results to managers through quantifiable data. In addition to quantitative research techniques, secondary source data and scientific writings of experts were utilized

Keywords: forecasting process; contingency theory; capital budgeting techniques; financial performance.