Real Options Theory And Its Applications In The Real Estate Investment

Real option, as a new theoretical approach, derived from finance option theory, was gradually applied to such fields as investment decision making, financial management, and value assessment. Real option is the development and application of financial option to the field of real investment.The real option view of real estate refrains from the traditional perspective and stresses the aspects of flexibility and variability. Flexibility equals a range of options an investor can choose from. Against this background the real option approach can supplement the weaknesses of traditional methods by adding an option value to solely NPV-based static value of an investment project. 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.In the first chapter, the thesis expounds the limitations of traditional investment decision making methods, and then demonstrates the reasonable and scientific features of real option. By the use of financial option, this chapter introduces real option and reviews literatures of the field.In the second chapter, based on the option pricing theory (OPT), the thesis detailedly described the thinking of real option pricing: No—Arbitrage and risk— neutral, then introduced two valuation models: Black—Scholes model and binomial option model. The latter is deduced according to the OPT in this part. At last, the approach is supplemented according to the value leakage.In the third chapter, by expounding the risk & uncertainty of real estate project ,the option characteristics and common option Problems of the investment decision of real estate project are analyzed in details. And the basic frame of the application of real Option approach in the decision is built.In the fourth chapter two cases from practice are discussed: First is about the development of vacant land. An option to defer investment is created because the project maybe defer to invest; Second is about the leasehold or purchase of a mall. The priority to buy the mall provides an option to switch use. The author establishes real option valuation models, and then computes the value of real option with VBA, analyze the effect by all factors lastly. Such cases are expected to provide paradigms to the application of real option in real estate investment.The last part mainly illuminates the research work, points out some issues needed to pay attention to and prospects the trends of the real option approach in the future research.