By T. Arnold

Aimed at practitioners with no earlier services within the subject, this book helps readers build easy genuine recommendations types to help in decision-making. Providing a pragmatic and informative strategy, the authors introduce uncomplicated chance theories, before placing those theories right into a real-world context.

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Extra resources for A Pragmatic Guide to Real Options

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In the game of chance example, the real option emerged when the game became sequential. 00. 33 because this was actuarially fair for the purveyor of the game (and the player as well). 00. 50 to roll the die). The value for the opportunity to roll a second die given the first die roll produced a 6 was calculated with minimal use of probability (and statistics). However, to be more efficient at valuing real options, the use of “probability” is essential. Fortunately, much of the necessary knowledge of probability is not extensive.

00). 14). 00. 52. The next two-month increment will produce four possible sixmonth prices. 14. 51, there is some rounding error in the calculation). 24). 88. 63). 00. 3 displays the results of the “almost” completed binomial tree. 63 To complete the tree, the probabilities of the four six-month prices need to be calculated. 67%)3). 51, the probability calculation is more complicated because P(U) P(U) P(D) can occur in more than one way: two up moves followed by a down move, a down move followed by two up moves, and so on.

00. , exercising the put option) would be disadvantageous. 63, exercising the put is valuable. 76). 37). 6. 37)). 02%)1). Notice, an at-the-money call option and an at-the-money put option are not the same price. In fact, the at-the-money call option will always be worth more (see the next optional section). Although much has been accomplished with the binomial tree in this chapter, there are some issues that need to be resolved. How are U, D, P(U), and P(D) calculated within the binomial tree?

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