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Study On The Application Of Real Option Approach To Investment Decision-making In Real Estate

Posted on:2004-09-11Degree:MasterType:Thesis
Country:ChinaCandidate:J L TangFull Text:PDF
GTID:2156360095456736Subject:Management Science and Engineering
Abstract/Summary:PDF Full Text Request
Real option, as a new theoretical approach, derived from finance, was gradually applied to such fields as investment decision-making, financial management, and value assessment. Real option is the option whose underlying asset is real investment. More specifically, in such economic activities as management and investment, real option refers to the possibilities of future business management and investment, and it refers to the right obtained in all kinds of ways to make decisions according to the market. Real option is the development and application of financial option to the field of real investment. In the field of real estate, traditional decision-making methods cannot use uncertainties to create value while real option approach can change the degree of influence resulting from uncertainties. Through the use of passive and active flexibility, real option can avoid negative consequences brought about by uncertainties and retain positive influence, thus creating value. This forms a new way of thinking in real estate investment decision-making.Since real option approach is so reasonable and advantageous, with a combination of theory and practice, a combination of quantitative and qualitative analysis and contrastive analysis, this dissertation has systematically introduced the characteristics, the significance and pricing model of real option approach in real estate investment decision-making and has elaborated the process of its creative use in real estate investment. This paper has gone deeper by making a comparison with examples between traditional investment methods and real option approach to real estate projects, thus, revealing the tremendous potential of real option. It has further provided the approach to effective use of flexibility value in real estate project. This helps decision-makers face the market, grasp opportunities and analyze problems in the long run so as to create more value potential for business. Firstly, through contrastive analysis, limitations of traditional investment decision-making methods are challenged and the reasonable and scientific features of real option are demonstrated. The definition and development of real option is explained by the use of financial option. The application of real option to real estate investment decision-making is not just a simple negation of the traditional investment analyzing methods, but a breakthrough of their limitations and further development on the basis of retaining the essence of traditional investment analyzing methods.Secondly, the value and the value source of real option is analyzed, and the real option characteristics in real estate investment decision-making is also proved in detail, thus it is obvious to find the significance of real option to real estate investment decision-making. This would change the way people create value and provide a new approach to investment decision-making. Additionally, the potential value of real option in real estate investment is explored in quantitative and qualitative perspectives. Quantifiable analyzing tools of real option value are provided and the main models of calculating real option value including binary tree model and Block-Scholes model are presented.Finally, by means of case studies in real estate tapping, we improved investment decision-making principles are put forward by applying the pricing models of real option. This provides evidence for the change of way of thinking. And this would avoid the negative consequences resulting from uncertainties and create more opportunity value, thus forming new investment decision-making approach.
Keywords/Search Tags:real option, investment decision-making in real estate, uncertainties, real option pricing
PDF Full Text Request
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