![]() The basic model for analysing investment real options assumes that the project value follows a geometric Brownian motion (GBM) over a finite investment horizon, with a fixed or pre-determined investment cost (i.e. In this setting, ROVs merely allow the subjective ranking of opportunities to invest in alternative projects. So, unlike the premium on a financial option, the ROV has no absolute accounting value. The ROV represents the certain dollar amount, net of financing costs, that the decision maker should receive to obtain the same utility as the (risky) investment in the project. the investor) and it will depend on her attitude to risk. The real option value (ROV) is the value of this decision opportunity to buy or sell the project it is specific to the decision maker (i.e. Footnote 1 Similarly, we identify the option strike with the investment cost for the project and in the following we shall use these two terms synonymously. Any higher price would exceed her value and she would not buy the project any lower price would induce her to certainly buy the project. Following Kasanen and Trigeorgis ( 1995), we identify the project value with a market price that is the ‘break-even’ price for which a representative decision maker would be indifferent between buying or not buying the project. The term ‘investment’ real option concerns the opportunity to buy or sell a project (such as a property-real estate, a company, a patent etc.) or a production process (such as an energy plant, or pharmaceutical research and development). It is a right, rather than an obligation, whose value is contingent on the uncertain price(s) of some underlying asset(s) and the costs incurred by exercising the option. 53-93.The original definition of a real option, first stated by Myers ( 1977), is a decision opportunity for a corporation or an individual. 30), Emerald Group Publishing Limited, Bingley, pp. (2014), "Extending the real options approach by including information options", Signs that Markets are Coming Back ( Research in Finance, Vol. ![]() The author appreciates Phelim Boyle’s updated, electronic algorithm supplied from the working paper version of Boyle/Tse (1990) and the updated, electronic version of the multivariate normal subroutine MULNOR supplied by Mark Schervish. We gratefully acknowledge the many helpful comments from Lenos Trigeorgis and Gordon Sick. This chapter extends several important real option applications into the information realm, including jump process models and models for valuing options to synthesize any of n information items into any of m output assets. Information Options may involve high volatility or jump processes as well, further enhancing their value. Also, while exercising a financial option typically kills the option, Information Options may include multiple exercises. Information Options are similar in concept to real options but substantially different in their details, since real options have physical objects as the underlying assets and the rules governing exercise are based on the realities of the physical world. Next, the information product is presented to the user via an efficient interface that does not require the user to be a field expert. Then bits of information are selected from storage and synthesized into an information product (such as a management report). The next refinement is to organize the data into structured databases. The initial stage involves observation of physical phenomena with accompanying data capture. Information Options arise at several stages of value creation. ![]() Information Options can be modeled as options to “purchase” information assets by paying the cost of the information operations involved. With Information Options, the underlying assets are information assets and the rules governing exercise are based on the realities of the information realm (infosphere). Analysis of Information Options offers new tools for evaluating investments in research, mineral exploration, logistics, energy transmission, and other information operations.
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