Real Options And Their Investment Decision

Faced with complicated condition, enterprises have difficulties in making investment strategy. Usually, these investments are made in flexibile condition. The investmentopportunity brings the benefits. At same time, it brings risk. It can't be measured exactlywith original ways. In order to evaluate the investment opportunity better, it introduces anew concept, namely, real option.Real option is an opportunity. And it is a contingent decision. Compared with some original ways, it enables people to make decision more effective. Having considered flexibility, real option theory appllies a new way to evaluate investment strategy. First, the thesis introduces some basic theory of real option, which includes defmation and classfication of real option. Second, it introduces three price models. They are B-S model, Binomial-Lattice model and Geske model. B-S model and Binomial-Lattice is well known. And Geske mode is unfamiliar to the people. The pricing of the real option is on the basic of the finance option. Then it elaborates the relation of the real option and investment and analyzes the feasibility to apply the real option theory. Include the invesment in the flexibile condition, the comparison of real option way and original way and applying prerequisite of real option theory. And at the end of the thesis, there are some examples to explain how to use these price models to evaluate the strategy.By the comparison, it is obvious to see the effect of real option theory. To the decision maker, it is important to think in the way of real option. And real option theory offers a new way to make decision. In fact real optin not only is a evaluation tool, but also is a kind of thinking pattern.