Material option

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Real option (real option, material option) - kind of investment project assessment method, which evaluates its validity from the point of view of approaching the option. A real option is a right (but not an obligation) to change a decision regarding an investment project, when new information appears that relates to a given investment project.

An example of using the real option is an investment in a biotechnology company, which can be equated with the purchase of a long call option. If a company fails in its research and goes bankrupt, the investor's loss will be limited to the amount of investment (option premium). If the research proves successful, the investor's profits are theoretically unlimited (this results from the construction of the long call option).

Features of real options: Bibliography

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