Definition for : Real options

Classic methods of Investment analysis disregard the flexibility managers have even after starting the project. They can abandon it, expand it, etc. Real options measure this flexibility. Real options give the right, but not the obligation, to change an Investment project and in particular, when new information on its prospective returns becomes available. Real options include (non-exhaustive list): Option to launch a new project, Option to develop or extend the business, Option to reduce or contract business, Option to postpone a project, Option to defer progress of the project, Option to abandon. A real option is often called a Hidden option, because many Investors do not explicitly admit its existence.

(See Chapter 31 Valuation techniques of the Vernimmen)

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