Date of Original Version

3-2006

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

Managers responsible for capital investment decision making need valuation models that can navigate both corporate finance and competitive strategy to generate well-grounded prices. Real options provide the firm with flexibility to adapt to changes in its environment. The dynamic nature of real options in the new economy makes them more difficult to price than stock options. Since real options cannot be modeled by replicating portfolios of traded securities, payoff estimates are not as precise as those for stock options. This paper will analyze the aspects of the new economy that affect the calculation of growth opportunities, and introduce models that can allow managers to better understand how these aspects influence real asset option payoffs.

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