Application Of Down Knock-out Option To The Real Estate Development Investment Decision

The traditional methods to make the real estate investment decisions have many limitations, the most important of which neglects something of value when making real estate investment decisions under uncertainty and dynamic choice of timing. Therefore, it is more deficient to make the decision scientifically and reasonably with them. Under this idea, the real option theory is introduced into the real estate investment decisions, and the process of the real estate development project investment decisions is improved considering thoughts of prudent investment decisions. It is similar to down knock-out option that the investor only make investment decisions when the net value of sales stage reaches fixed standard. As a more reasonable approach, which takes into account not only the defect of NPV, but also the opportunity for the investment, and offers to good theory base and appraisal method, particularly prudent investment decisions.The several parts of the paper are as follows:The first part of the article briefly introduces the research background, meaning of selected topic, and makes a general summary of research achievement, and points out research range and method of the paper and innovations in the article.The second part introduces the real option theory and two basis models—binomial model and Black-Scholes formula. The third part of the paper introduces the real estate investment characteristics in China and the traditional methods, and draws the real option methods of the real estate investment decisions, and proposes an analytical framework and hypothesis condition of the real estate investment decisions based on the real option theory.The forth part estabilishes the model of the real estate investment decisions based on down knock-out option and analyzes sensitivity of important parameters of the model. This is the hard core of this paper. The fifth part uses down knock-out option method of the real estate investment to study a case of the real estate development, and carries out sensitivity analysis of several parameters. To analyze the case of real estate development and investment, it is proved that down knock-out option method is more available and maneuverable than the traditional method of the real estate investment decisions. As a useful attempt to evaluate real estate investment, it is significant to apply down knock-out option to study the development and investment of real estate in China.