Download A Pragmatic Guide to Real Options by T. Arnold PDF

By T. Arnold

Aimed at practitioners with no previous services within the subject, this book helps readers build simple actual ideas types to help in decision-making. Providing a pragmatic and informative process, the authors introduce easy likelihood theories, before placing those theories right into a real-world context.

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Extra info for A Pragmatic Guide to Real Options

Sample text

From Firm B’s perspective, an opportunity is being sold that appears to be like a put option, however, the opportunity is sold at a specified price that is not above the value of Firm B. In reality, Firm B does not have a put option, but has the short position on the call option held by Firm A in which Firm B can be sold at a price that is at or below the value of Firm B (otherwise, Firm A will not exercise the option). e.. , like a short position on a call option in which the strike price is below the spot price).

33%). 33%) ). Not that it affects the probability calculation, a binomial coefficient of ( 30 ) = 1 can be inserted into the probability calculation: ( 30 ) P ( D ) P ( D ) P ( D ). 75 probability calculation for three consecutive upward price movements: ( 33 ) × P (U ) × P (U ) × P (U ). Usually, the associated binomial coefficients for the highest and lowest possible future prices in a binomial tree are ignored because in both cases, the binomial coefficient will equal 1. 4 displays the full tree with the associated probability distribution.

It is not terribly important to understand why it works, but because there may be some curiosity regarding such a question, a quick explanation based on the earlier calculation may be helpful. The numerator is based on the number of combinations that exist for using three letters with a choice of three different letters without substitution (say A, B, and C) and is equal to 3!. The potential combinations are: ABC, ACB, BAC, BCA, CAB, and CBA. The denominator is based on A and C being the same. In other words, the number of two-letter combinations of A and C is 2!.

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