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
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!.