The Valuation of Real Option in the Corporate Finance Assignment

The Valuation of Real Option in the Corporate Finance - Assignment Example Due to the flexibilities viewed in management, actual real options are quite to relate properly to the size of the project, the operation of the project and the timing of the project once it has been established. In all cases used, every upfront expenditure that has not been recovered yet and related to this type of flexibility refers to the option premium. Additionally, real options apply in the valuation of the stock. There are different types of real options. The first one is options that relate to the size of the project (Angelis, 2002). This is whereby the scope of the project is not certain, constitutes are optional and the flexibility of the size of various facilities is valuable. In real options to expand, the project is designed with capability in excess of the output levels that are expected for it to give a high rate. The management gets the option of expansion that is exercising the options in case the given conditions go out to be favorable. Projects having expansion options cost more in establishing, the excess referred to as the option premium. In real options to contract, the project is designed in a way that the given output may be contracted in the future in case the conditions become unfavorable. Option exercise consists of one forgoing these future expenses. According to Angelis (2002), this is the same as put option and the excess upfront expense is the option premium. In real options to expand, projects are developed in a way that it can operate dynamically. The second type of real option is options that relate to timing and the project life. In this type of category, growth options are the most generic because they have options of exercising the projects that are profitable when initiated. When initiating the project, the management has the flexibility at the time the project needs to start.  Ã‚