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Project Valuation Using Real Options by Chandra Papudesu, Prasad Kodukula

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ADVANCED OPTIONS

A real option in its simplest form is a right — with no obligation — to invest in a project at a later time. A deferral option is an American call option with a right to delay the start of a project. An expansion option is also an American call that gives the owner the right to scale up a project. Abandonment and contraction options are American puts where the owner holds the right to terminate or scale down a project by selling all or some of its assets, respectively. An option has value because there is market uncertainty related to the underlying asset. The idea is that once the uncertainty clears, the option may be exercised ...

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