1. Identifying Real Options

Now that we have covered the most prominent option valuation models, the logical next question is how to identify real options and how to estimate the relevant valuation parameters. That's the topic of this section.
To identify whether a real option is real, it makes sense to ask the following three questions (see also Damodaran): 
 
  1. When is a real option embedded in a decision tree or an underlying asset?
  2. When does this real option have significant economic value?
  3. Can the value be estimated using option pricing models?

 

The following  subsections discuss these three questions in more detail.