Abstract:

The paper deals with the topic of proper determination of volatility as one of the variables that is needed for option value calculations. Real options could be used as a beneficial tool for valuating managerial flexibility to adapt decisions in response to unexpected market developments and changes. The mentioned flexibility of intended investments includes for example the possibility to react to new information, that can be seen as an option (the right, not obligation) to undertake some business decision and can be valuated. Companies create shareholder value by identifying, managing and exercising real options associated with their investment portfolio. The real options methodology applies financial options theory to quantify the value of company’s management flexibility in a world of uncertainty and frequent changes. If used as a conceptual tool, it allows management to characterize and communicate the strategic value of an investment project and accept them. Traditional methods (e.g. Net Present Value) fail to accurately capture the economic value of investments in an environment of widespread uncertainty and rapid change. The real options method represents the new technique for the valuation and management of strategic investments. The real option method enables corporate decision-makers to leverage uncertainty and limit downside risk. Real Options Valuation is revolutionizing corporate strategy and bridging the gap between finance and strategic planning. Just as an option gives its owner the right - but not the obligation - to take a particular course of action at some time in the future, flexibility embedded in capital investment projects and company strategies allows managers to take a staged approach to corporate strategy and react to changes in the business and external environment, so they can limit downside losses while fully capitalizing on upside potential opportunities. The true NPV of a project can be viewed as the sum of the traditional NPV and the values of inherent real options: True NPV = Traditional NPV + NPVs of Real Options.