A real option is the right, but not the obligation, to undertake some business decision, typically the option to make a capital investment. For example the opportunity to invest in the expansion of a firm's factory is a real option. In contrast to financial options a real option is not tradeable - e.g. the factory owner cannot sell the right to extend his factory to another party, only he has the decision to make. The terminology "real option" is relatively new, whereas business operators have been making capital investment decisions for centuries. However the description of such opportunities as real options has occurred at the same time as thinking about such decisions in new, more analytically-based, ways. As such the terminology "real option" is closely tied to these new methods. The term "real option" was coined by Professor Stewart Myers at the MIT Sloan School of Management. In finance, an option is a contract whereby the contract buyer has a right to exercise a feature of the contract (the option) on or before a future date (the exercise date). ... Stewart C. Myers is the Gordon Y Billard Professor of Finance at the MIT Sloan School of Management. ... The Sloan School of Management, one of the five schools of MIT, is one of the worlds leading business schools. ...

In the 1970s and the 1980s, developments in the valuation of capital-investment opportunities based on options pricing revolutionized capital budgeting. Managerial flexibility to adapt and revise future decisions in order to capitalize on favorable future opportunities or to limit losses has proven vital to long-term corporate success in an uncertain and changing marketplace. In this book Lenos Trigeorgis, who has helped shape the field of real options, brings together a wealth of previously scattered knowledge and research on the new flexibility in corporate resource allocation and in the evaluation of investment alternatives brought about by the shift from static cash-flow approaches to the more dynamic paradigm of real options -- an approach that incorporates decisions on whether to defer, expand, contract, abandon, switch use, or otherwise alter a capital investment. Comprehensive in scope, Real Options reviews current techniques of capital budgeting and details an approach (based on the pricing of options) that provides a means of quantifying the elusive elements of managerial flexibility in the face of unexpected changes in the market. Also discussed are the strategic value of new technology, project interdependence, and competitive interaction. The ability to value real options has so dramatically altered the way in which corporate resources are allocated that future textbooks on capital budgeting will bear little resemblance to those of even the recent past. Real Options is a pioneer in this area, coupling a coherent picture of how option theory is used with practical insights in into real-world applications.

In capital investing, as in life, you always have options. In today's extremely turbulent world, managers recognize how risky the most valuable investment opportunities often are, and how useful a flexible strategy can be. That's why they want to know all their options. Yet many current financial assessment tools fail to identify what investors can do to capitalize on future uncertain events. Martha Amram and Nalin Kulatilaka suggest a smarter new way to think about strategic investments in terms of real options. By applying options thinking---the concept behind the recent Nobel Prize-winning work on financial options---to the evaluation of nonfinancial assets, this innovative approach brings a financial market discipline to the evaluation of a company's opportunities. Using real options theory, managers can more effectively target crucial opportunities to redeploy, delay, modify, or even abandon capital-intensive projects as events unfold. Corporate executives in finances, investments, and project management should share this book with decision makers in information technology, strategic planning, corporate restructuring, venture capital, and law. Through timely case studies, the authors show managers how to use real options to evaluate investments and create exit strategies in R&D, product design, contracts, and information technology. By linking strategic vision and tactical project decisions, Real Options helps to improve capital investment planning and results.

external links

• Identifying real options Prof. Campbell R. Harvey, Fuqua School of Business
• Applications of option pricing theory to equity valuation Prof. Aswath Damodaran, Stern School of Business
• An extensive list of links to articles, papers and information at moneyscience.org
• An introduction to real options (PDF), The Investment Analysts Society of South Africa
• Applying Options Theories to Technology Management Decisions, CTO Network Library, 2005.

In the 1970s and the 1980s, developments in the valuation of capital-investment opportunities based on options pricing revolutionized capital budgeting. Managerial flexibility to adapt and revise future decisions in order to capitalize on favorable future opportunities or to limit losses has proven vital to long-term corporate success in an uncertain and changing marketplace. In this book Lenos Trigeorgis, who has helped shape the field of real options, brings together a wealth of previously scattered knowledge and research on the new flexibility in corporate resource allocation and in the evaluation of investment alternatives brought about by the shift from static cash-flow approaches to the more dynamic paradigm of real options -- an approach that incorporates decisions on whether to defer, expand, contract, abandon, switch use, or otherwise alter a capital investment. Comprehensive in scope, Real Options reviews current techniques of capital budgeting and details an approach (based on the pricing of options) that provides a means of quantifying the elusive elements of managerial flexibility in the face of unexpected changes in the market. Also discussed are the strategic value of new technology, project interdependence, and competitive interaction. The ability to value real options has so dramatically altered the way in which corporate resources are allocated that future textbooks on capital budgeting will bear little resemblance to those of even the recent past. Real Options is a pioneer in this area, coupling a coherent picture of how option theory is used with practical insights in into real-world applications. The Fuqua School of Business The Fuqua School of Business is the business school of Duke University in Durham, North Carolina. ... The Leonard N. Stern School of Business is New York Universitys (NYU) business school. ... Portable Document Format (PDF) is a file format developed by Adobe Systems for representing documents in a manner that is independent of the original application software, hardware, and operating system used to create those documents. ...