VALUING REAL OPTIONS: CAN RISK-ADJUSTED DISCOUNTING BE MADE TO WORK?
This paper examines three alternative approaches to valuing real options: (1) the standard option pricing technique using "risk-neutral" probabilities; (2) the use of risk-adjusted discount rates; and (3) discounting certainty-equivalent values with a riskless discount rate. As suggested by the title, a question of particular interest is whether an approach based on risk-adjusted discount rates can be "made to work" for valuing options. The answer is yes. Indeed, the authors show that any of the three approaches will provide a correct valuation if properly employed. 2001 Morgan Stanley.
Year of publication: |
2001
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Authors: | Hodder, James E. ; Mello, Antonio S. ; Sick, Gordon |
Published in: |
Journal of Applied Corporate Finance. - Morgan Stanley, ISSN 1078-1196. - Vol. 14.2001, 2, p. 90-101
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Publisher: |
Morgan Stanley |
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