A Pragmatic Guide to Real Options by T. Arnold

By T. Arnold

Aimed at practitioners with no past services within the subject, this book helps readers build easy actual concepts types to help in decision-making. Providing a pragmatic and informative process, the authors introduce simple chance theories, before placing those theories right into a real-world context.

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Extra resources for A Pragmatic Guide to Real Options

Sample text

One minor point should be highlighted prior to concluding this section. , calculating the mean of the deviations from mean) or by calculating the mean of the absolute value of the deviations from mean. The first suggestion will always lead to a value of zero (as demonstrated earlier in this section). 82 for the standard deviation of X, which is clearly not equal to the square root of the variance of X. Stated simply, the standard deviation cannot be calculated without calculating the variance first.

Often, the square root of the variance is taken as a similar measure for determining how good of a predictor the mean is of future events. 005 The variance and the standard deviation measure “risk” or “uncertainty” about the mean as a predictor of the future. Some will consider risk and uncertainty to be different, but such a difference is not an issue in this text. Just as the mean or expected value is critical for determining the value of a real option, the risk (generally measured as a standard deviation) will also play a role in determining the value of a real option.

The holder of the option pays a “premium” to own the option and is considered the “long position” on the option. The long position determines if the option is exercised, and it is from the long position’s perspective as to whether the option is in-the-money, atthe-money, or out-of-the-money (sometimes called the “moneyness” of the option). The “short position” is the one that brings the financial option to market and is also referred to as the “writer” of the option. , buy at the strike price for a put option or sell at the strike price for a call option).

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