Real option and Underlying asset: Difference between pages

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Real options are the valuable operational choices available to the owners of projects and of businesses.
In relation to options, the underlying asset, or the underlying, is the asset which the option holder has the right to require the option writer deal in (at the strike price specified in the option).


For example, the options to expand, contract, defer or abandon the project (or business).
In relation to derivative instruments more generally, the underlying asset is the asset from which the cashflows, price and value of the derivative instrument are derived.


 
Sometimes known as the Physical.
The existence of valuable real options in favour of the owners generally increases the total value of a project or business.
 
For this reason a real options analysis of a proposal may in some cases result in a decision to proceed with the project, in circumstances where other project evaluation techniques would have led to rejecting the proposal.
 
 
However, it is also possible that a proposal may grant real options - perhaps inadvertantly - in favour of other parties.
 
In such a case, the other parties might in future exercise their real options ''against'' the interests of the owners, causing losses to the owners.
 
Such real options in favour of other parties are ''liabilities'' of a project or business, and ''reduce'' the total net value of the project or business.




== See also ==
== See also ==
* [[Abandonment option]]
* [[Delta hedging]]
* [[Contraction option]]
* [[Derivative instrument]]
* [[Deferment option]]
* [[Exotic option]]
* [[Expansion option]]
* [[Grant]]
* [[Option]]
* [[Option]]
* [[Project appraisal]]
* [[Strike price]]
* [[Real]]
* [[Underlying]]
*[[Real estate]]
* [[Volatility]]
* [[Real options valuation]]
* [[Termination option]]
 
 
== Other resource ===
* [[Media:2015_07_July_-_Hidden_treasure.pdf| Hidden treasure, The Treasurer, 2015]]
 
[[Category:Corporate_finance]]

Revision as of 15:57, 18 April 2014

In relation to options, the underlying asset, or the underlying, is the asset which the option holder has the right to require the option writer deal in (at the strike price specified in the option).

In relation to derivative instruments more generally, the underlying asset is the asset from which the cashflows, price and value of the derivative instrument are derived.

Sometimes known as the Physical.


See also

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