Real options

In this lesson

1. 0:00 Real options in investment appraisal
2. 1:02 Four types of real options explained
3. 2:15 Call options: delay and expand
4. 3:32 Put options: the abandon decision
5. 4:15 Calculating option value: worked example

About this lesson

value that traditional appraisal methods miss. You'll explore four types of real options: the option to delay (a call option allowing you to postpone investment), the option to expand (scaling up a project later), the option to abandon (withdrawing from a project at key stages), and the option to switch or redeploy assets. The lesson focuses on call and put options, showing you how to identify the five key inputs—underlying asset price, exercise price, risk-free rate, volatility, and time—and apply the Black-Scholes option pricing model to quantify the value of this flexibility. Through a worked example with Nic Co, you'll see how to calculate the value of delaying an investment decision. By plugging the project parameters into the Black-Scholes spreadsheet, you can determine whether the flexibility to wait is worth millions to your organisation. This approach is particularly valuable when facing economic uncertainty and helps management make more informed capital investment decisions by explicitly accounting for strategic choices and adaptability.

Duration: 6m