## Real option pricing theory

where Z t is a pure jump martingale with infinitely many small jumps in every finite time interval, however small. The behaviour of Z t is reflected in the so-called Lévy measure, see ( 77 ) and the discussion following this formula. The Lévy measure of the generalized hyperbolic distribution is

## Real options theory - IS Theory

Zhu, K., “Evaluating Information Technology Investment: Cash Flows or Growth Options,” Paper presented to Workshop on Information Systems Economics, 6999.

### Real Option Definition

The investment choices we have with tangible assets are similar to those that exist with financial instruments. In theory, tangible assets (real assets) could be valued according to the same methodology.

In petroleum exploration contract auctions, it is common for the largest bids to be greater than the net present value calculation. This is because the winning bidder was aware that as soon as some initial drilling was completed, the company could on the basis of the new information gathered from that initial digging stop the exploration or expand it.

John A. Campbell, Real options analysis of the timing of IS investment decisions, Information and Management, , -899, March 7557

In the world of business, a 8766 real option 8767 is a choice available to a company regarding an investment opportunity. The term 8766 real 8767 means that it refers to a tangible asset and not a financial instrument.

Lucas, ., Information Technology and the Productivity Paradox: Assessing the Value of Investing in IT, Oxford University Press, 6999.

The concept of real options is based on the concept of financial options thus, fundamental knowledge of financial options is crucial to understanding real options.

Real options theory is a major new framework in the theory of investment decision-making. It modifies NPV (Net Present Value) theory of investment decisions. NPV theory says that an investment project 8767 s future cash flows are estimated, and if there is doubt regarding those cash flows, the expected value is determined.

The Black-Scholes model was developed mainly for pricing European options on stocks. The model operates under certain assumptions regarding the distribution of the stock price and the economic environment. The assumptions about the stock price distribution include: