Real Option

AAA

DEFINITION of 'Real Option'

An alternative or choice that becomes available with a business investment opportunity. Real options can include opportunities to expand and cease projects if certain conditions arise, amongst other options. They are referred to as "real" because they usually pertain to tangible assets such as capital equipment, rather than financial instruments. Taking into account real options can greatly affect the valuation of potential investments. Oftentimes, however, valuation methods, such as NPV, do not include the benefits that real options provide.

INVESTOPEDIA EXPLAINS 'Real Option'

Note that this kind of option is not a derivative instrument, but an actual option (in the sense of "choice") that a business may gain by undertaking certain endeavors. For example, by investing in a particular project, a company may have the real option of expanding, downsizing or abandoning other projects in the future. Other examples of real options may be opportunities for R&D, M&A and licensing.

RELATED TERMS
  1. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
  2. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  3. Options Contract

    A contract that allows the holder to buy or sell an underlying ...
  4. Derivative

    A security whose price is dependent upon or derived from one ...
  5. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  6. Call

    1. The period of time between the opening and closing of some ...
Related Articles
  1. Investing Basics

    Pin Down Stock Price With Real Options

  2. Options & Futures

    Using Decision Trees In Finance

  3. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

  4. Professionals

    Top 10 Ways To Avoid Burnout In Corporate ...

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center