![]() ![]() exercise the option) may be implemented at any time up to the investment horizon. the option strike), where all risks can be hedged so that risk-neutral valuation (RNV) applies, and that decisions to invest or divest (i.e. 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. The proposed method is a contribution that offers subsidies to improve decision-making processes to evaluate investments.The original definition of a real option, first stated by Myers ( 1977), is a decision opportunity for a corporation or an individual. Originality/value – The results show that, if a manager has the right to invest in the future and wait for better oil prices, postponing the development of an oil field adds value to his assets. Next, by using the binomial model to represent the process of oil barrel price diffusion, the asset value is calculated considering the flexibility of delaying the development of the field. Although reduced, we attested that there is a likelihood of feasibility. However, by incorporating uncertainty into the decision-making process, other results were obtained. Findings – Initially, according to the traditional method, we suggest that the decision-maker does not invest in the development of the field. Design/methodology/approach – The research was conducted according to the principles of modeling and simulation, based on a structure that consists of three phases, in order to facilitate project feasibility analysis. ![]() Purpose – The aim of this research is to analyze the feasibility of developing a real oil field in Africa under a production sharing agreement, through the application of the real options theory. ![]()
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