The Uncertainty Of Investment Decisions Based On Real Options Theory

To resolve the issue of equity investment under uncertaincircumstances, this thesis provides the relevant theories and approachesfrom a different perspective. According to the uncertainties involved inthe current investment projects and the pertaining characteristics of realoptions, by using the theoretical method of real option under newframework, the thesis analyses the factors usually neglected bytraditional evaluation methods, including the irreversibility, uncertaintyand deferability of the investment. Furthermore, the recommendationswith regard to the analysis above are also provided. In order to ensurethe uncertainties to become investors' opportunities rather than risks, themodel of real option is used to value the project and manage the mobilityof the investment.Initially, this thesis introduces the research background and theobjects. Subsequently, it reveals the development of the practice of realoption applying to the investment decision as well as the domestic andoverseas status of research in relation to this issue. After that, thetraditional approach of investment decision together with the limitationof the application of the improved method is analyzed. Eventually, thetheoretical framework of real option is derived, discussing theuncertainty of the investment, identifying the real options, and valuingthe real option by applying the pricing model of the financial realoptions. Due to the difference between the financial real options and real options, the selection of the parameters is adjusted to a certain extent.This report distinguishes the application dimension as well as the meritsand drawbacks of the traditional investment evaluation and real optionevaluation. The focus is placed on the establishment of the applicableframework of real options and the consolidation of scenario analysis andreal options. The major steps are developed as follows:1. It indicates the feasible applicable framework of real options anddecreases the difficulty of the application of real options in real life.2. The pricing model is analyzed by comparison. Under the complexcircumstance, it has been analyzed that how to adopt these Methods toovercome the issues occurring in different situations, including theunavailability of the solutions in some situations and the fluctuationprobability determined by binomial tree.3. Adopting the combination of scenario analysis and real options toforecast the likely future scenarios and the route dependency ofscenarios. Subsequently, the investors will undertake analysis of the realoptions and management strategy based on the specific scenarios.4. Case research. Using scenario analysis and real option to evaluate thetechnology upgrade of Indian BNSL Company under the framework ofreal options.