THE REAL OPTION MODEL – EVOLUTION AND APPLICATIONS
|Author(s):|| PhDr. Mgr. Jana Gutiérrez Chvalkovská , Blaha, S., Pecena, M. (eds.)|
† Ing. Zdeněk Hrubý CSc., Blaha, S., Pecena, M. (eds.)
|Type:||Chapter in book|
|ISSN / ISBN:|
|Keywords:||real option, rational option pricing, managerial real option, investment decision-making, energy|
|Suggested Citation:||Chvalkovska, J., Hruby, Z. (2010): THE REAL OPTION MODEL – EVOLUTION AND APPLICATIONS, in: Blaha, S., Pecena, M. (eds.) (2010): Advanced measurement techniques for market and operational risk, Karolinum, forthcoming|
|Grants:||GACR 403/10/1235 (2010-2014) Institutional Responses to Financial Market Failures IES Research Framework Institutional task (2005-2011) Integration of the Czech economy into European union and its development|
|Abstract:||This paper presents an overview of the evolution, categories and application of the real option model. The real option is a specific instrument for risk assessment developed on the basis of a model created by Merton (1973) in his article “The theory of rational option pricing”. This article follows the consequent development of this model into two evolution branches – one is represented by the simplified models based on the work of Box, Cox and Rubinstein (1979), the second one expands the stochastic version of the Merton’s model and could be represented by the work of Dixit, Pindyck (1994).
Further on, the paper presents the general conditions for the application of the real option model in investment valuation and summarizes the main categories of real options. This part of the paper analyzes the major advantages of the utilization of the real option model as well as its most important pitfalls.
The introduction of the general principles of the real option model serves as a background for the demonstration of the practical application of the real option models. Examined is both the application of the simplified version of the model that found its main field of application in management as well as the deployment of the more sophisticated, stochastic version of the model. The overview of the real option applications is concluded by an example from the energy sector that provides a practical manifestation of the utilization of both versions of the model.
The aim of this paper is to analyze the application aspects of the real option theory in the investment decision making. The base of the analysis is formed by the insight into the history of the real option theory and of its two branches and thus provides a complex evaluation of the real option context. The general description is accompanied by practical examples of the real option use.