Research On The Real Options Theory Andits Application In Investment Decision-Making

During the recent 20 years, the options theory in western countries has developed rapidly, followed close behind by the application study. The real options theory emerges from this situation. And it can be concluded as"a tool, precisely, thought model " essentially, far exceeding a kind of derivative finance tool. From the academic sense, the options related theory is one of the greatest discoveries in 20's economics field , and especially ,the Options Prizing Theory is born revolutionarily. Its principle, approach and conclusions are used to analyze the macro and micro economic problems and make policies. From the reality sense , the options means some kind of choosing right. It exists objectively,especially, in the investment and managerial field. If the expenses and the return are the same, people will prefer a project with flexibility, because the flexibility will lead to more opportunity .Now in an economic environment characterized by rapid technology development and intense competition , it has become increasingly important for corporate managers to react properly to great uncertainty to survive and develop. The real options theory provides a new framework and analytical skill to these companies, avoiding empiricism default and the defect of traditional capital budgeting techniques.This paper came into being in view of the above mentioned reasons. It includes five parts. The 1st chapter introduces the main theory and the study trend of the realoptions, focusing on calculating its value by means of the formula, which stresses a viewpoint that the real options is a thought model essentially, thus keeping aloof of the abstract and obscure mathematics knowledge.The 2nd chapter sums up the significance of the real options and its application. It analyzes the options character and the value of investment decision-making, and the superiority of the real options approach, compared with the traditional capital budgeting techniques (NPV, chiefly). The 3 rd chapter attempts to explain how to construct properly the practical frame and how to execute it. The 4th chapter analyzes a group of simple practical examples and one specific case through the 4-steps Method .In the 5th chapter, I make a summary of the real options application, evaluation and give some suggestions according to China's reality.