ECONOMICS

Detailed explanation-1: -A real option gives a firm’s management the right, but not the obligation to undertake certain business opportunities or investments. Real option refer to projects involving tangible assets versus financial instruments. Real options can include the decision to expand, defer or wait, or abandon a project entirely.

Detailed explanation-2: -Real options theory analyzes the value of managerial flexibility to adapt and revise future decisions to capitalize on favorable future investment opportunities or to limit downside losses from adverse market developments, which is vital to long-term corporate success in an uncertain and changing marketplace.

Detailed explanation-3: -Real options reasoning presents a rational survival strategy for project managers to use flexibility in order to cope with environmental uncertainty. The usefulness of real options logic highly depends on the amount of uncertainty perceived by project managers (Dixit & Pindyck, 1994).

Detailed explanation-4: -Types of Real Options Real options may be classified into different groups. The most common types are: option to expand, option to abandon, option to wait, option to switch, and option to contract.

Detailed explanation-5: -Real options include derivatives that get their value from future decisions. These give the holder the right to make a decision in the future. Financial options are derivatives that get their value from underlying financial instruments, such as stocks or bonds.