By T. Arnold
Aimed at practitioners with no previous services within the subject, this book helps readers build easy genuine innovations versions to help in decision-making. Providing a pragmatic and informative strategy, the authors introduce simple likelihood theories, before placing those theories right into a real-world context.
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Extra resources for A Pragmatic Guide to Real Options
One minor point should be highlighted prior to concluding this section. , calculating the mean of the deviations from mean) or by calculating the mean of the absolute value of the deviations from mean. The first suggestion will always lead to a value of zero (as demonstrated earlier in this section). 82 for the standard deviation of X, which is clearly not equal to the square root of the variance of X. Stated simply, the standard deviation cannot be calculated without calculating the variance first.
4 displays the full tree with the associated probability distribution. 00 (currently, the call option is at-the-money because the spot price and strike price are equal). Because the call is European in style, it can be exercised only at maturity. Consequently, to price the option, only the sixmonth prices need to be considered to determine the option value six months into the future. 75%. 20). 51). 00). 5). 00)). 14. 04% ÷ 2). 02%)1). 00 can be valued. 00. , exercising the put option) would be disadvantageous.
The value received from exercising the option may or may not be in excess of the premium paid for the option. The short position receives value if the option is not exercised because the short position receives the option premium. The short position’s value decreases possibly to a loss if the option is in-the-money and exercised. In real option analysis, determining whether the real option is similar to a call or a put is not of real importance except for understanding the academic literature concerning real option analysis.