{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

10 Real Options

10 Real Options - Real Options Valuation of real options in...

This preview shows pages 1–6. Sign up to view the full content.

FIN 819: Lecture 10 Real Options Valuation of real options in Corporate Finance

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
FIN 819: Lecture 10 Today’s plan Review what we have learned in the last two lectures Real options Spot real options Value real options Use the Black-Scholes formula to value real options Use the risk-neutral probability to value real options Case discussion
FIN 819: Lecture 10 What have we learned in the last lecture? In the last lecture, we have learned Use a binomial tree to value options What is the basic idea behind the approach? The risk-neutral valuation How to calculate u and d. The Black-Scholes formula There are five parameters

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
FIN 819: Lecture 10 Revisit of Risk-neutral probability The price of call option is let p=(R f -d)/(u-d) < 1. Then - - + - - = - - + - - = + = d f u f f f u d d u C d u R u C d u d R R R d u dC uC d u C C B S C 1 ) ( [ ] d u f C p pC R C ) 1 ( 1 - + =
Risk-neutral probability (continue) Now we can see that the value of the call option is just the expected cash flow discounted by the risk-free rate. For this reason, p is the risk-neutral probability for payoff Cu, and (1-p) is the risk-neutral probability for payoff Cd. In this way, we just directly calculate the risk- neutral probability and payoff in each state. Then using the risk-free rate as a discount rate

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 15

10 Real Options - Real Options Valuation of real options in...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online