Real Options in Investment Decision 1997 Nobel Prize for Economics awarded to Robert. Merton (Robert.C.Merton) and Myron. Scholes (Myron.S, seholes), not only because they successfully solved the option pricing problem, the promotion of financial derivatives The Fa Zhan, more importantly, the discovery that they promoted the option theory in other economic areas of Guangfanyingyong, makes some among the most difficult economic field the uncertainty we obtain the interpretation of Liang Hua and Yi Ding. The most attention, and gradually the people who implemented the project evaluation and investment decisions is the real option (realoption) analysis, which overcomes the shortcomings of NPV in theoretical and empirical challenges can not be resolved, is more and more of the investment decision-makers recognized and used. A financial option and real option in the definition of Financial option (option) is a contractual right to give the holder a period of time in the future to a certain price to buy or sell a financial asset (stock, futures, interest rate, etc.) right. According to the execution time of different options can be divided into European-style options and American options. European-style homes off-site day of love is the holder the right flowers have a fixed time in the future purchase or sale of the rights of a financial asset; American option is the holder of a certain period of time in the future any time to buy or the right to sell a financial asset. Another option under the holder&#39;s rights can be divided into straight call and put options on their homes birthday flowers, including a call option gives the holder at a future time to a certain price for the rights of certain financial assets, bearish option holder is given a certain time in the future to sell certain rights of certain financial assets. Real option is derived from the financial option for a class of options. Broadly speaking, real option is the project investment decision-making; narrowly speaking, it is investment in the future to give policymakers the right to take some kind of investment decision. In fact, a company to assess a project, with investment opportunities in the project which is like buying an American option, the option to give investors a certain period of time in the future by the exercise price (investment cost) to buy the underlying asset (to obtain the project). Like financial options with the option of the underlying asset (the project&#39;s net present value) fluctuate with the market. When the market value (net present value of the project) is greater than the exercise price (investment cost) when it is profitable, so that investors will choose to implement the option to invest in the project. The option because of uncertainty about the underlying asset has value. Financial option and real option in the difference between the parameters can be expressed in the following table: Although the basic features of view, real options and financial options to send flowers home network of 10 straight points on similar but not identical. Differences between them are mainly embodied in the following four aspects: First, non-exclusive. Financial options have exclusive ownership, and real options in addition to the franchise, the do not have the exclusive. Second, non-transactional. Trading of options has two meanings, the underlying asset transactions and trading of options itself. For the financial option for both the underlying asset or the option is there with a more efficient trading market, so the transaction costs low, even negligible. Real options is not, not only the underlying asset - investment projects are almost non-existent market, real option itself is not a separate transaction. 3, the first account of. As can be shared or competitive existence, first implementation of real options are available to pre-emptive effect, not only made a strategic initiative, but also achieves the maximum value of real options. 4, has relevance. For the financial option, its exercise price entirely depends on the size of their own characteristics, that is, the implementation of the underlying asset price and the price difference, independent of other factors that it is independent. This independence is not real options exist. In most cases, enterprises have existed between the various real options has relevance, that is a real option exercise price depends not only on its own characteristics, but also with other yet-to-value of the real option. Second, financial options and the kind of love right on the pricing of their homes to send flowers online As the uncertainty of the underlying asset makes the options have some value, financial options pricing theory after decades of research have developed a more comprehensive pricing system. Two more for today&#39;s financial option pricing models are the Cox, Ross and Rubinstein, who proposed the binomial pricing model and the Black, Scholes option pricing model proposed by continuous, they are based on the principle of risk-neutral and arbitrage-free basis. According to this principle, by constructing the underlying securities and portfolio risk-free bonds, copy the appropriate options in the income characteristics of the cost to construct the portfolio is the current price options. Since real options and financial options in exclusive, the difference between trading and other aspects of real options in pricing makes difficult. Fortunately, 5.P.Mason and RCMerton that certain assumptions, it can be deduced using the method of financial option pricing model to establish the real option pricing model. Real option pricing, the key is to find a market in the capital and for evaluation Shijizichan or Xiangmujuyou same Fengxian characteristics of marketable securities Chen Zhiwei, &quot;twin security&quot;, and also the love of tradable securities on the Youguan information to send flowers Jia Yuan instead of physical assets and the volatility of prices and other information, and use of financial option pricing methods to the real option pricing. Real option at this stage of quantitative analysis methods are: (1) PDE (Partialdifferentialequa-tion) method - analytical solution (Blaek-Se-holes option pricing model), analytical approximate solution, numerical solution (finite difference method); (2) Dynamic Programming - binary tree model; (3) simulation - Monte Carlo simulation. Third, the specific case To illustrate the process of real option pricing and investment decisions in the role of specific examples we see the following: An investment amount of 11 million yuan, a year after the cash flow generated by the project, there are two possibilities: Market bullish 18 million yuan; slump 6 million yuan, has remained the same since. From the current forecast its cash flow for the 10 million yuan, the project&#39;s life for one year. Market to improve, to the possibility of the bad 50%, risk-free interest rate of 8%, CAMP&#39;s 风险报 酬 率 estimated 20%. Suppose investors can invest in can immediately decide whether to invest a year later. (1) the traditional NPV method, NPv = (0.5 * 1800 +600 * 0.5) / (1 +0.2) -1100 =- 100 since NPV &lt;0, should reject the project. (2) use option theory, the use of two pricing models can be obtained its value. Because it would be the equivalent of a call option, when cash flows increase and more than 11 million yuan when the exercise price will be implemented, or else give up. In order to determine the value of real options and the first to find a real option has the same risk characteristics of the &quot;twin security.&quot; Suppose we find in the stock market on a stock S. The stock&#39;s current market price of 20 dollars per share, one year after the price is expected to be up or down to 36 dollars to 12 dollars, that is u = 1.8, d = 0.6, and the probability of occurrence of these two cases are 0.5 . Clearly, the stock&#39;s risk characteristics and risk characteristics of investment projects are identical, consistent with doing &quot;twin security&quot; conditions. Find a &quot;twin security&quot;, we can follow the binomial pricing of financial options to export the idea of binomial option pricing formula in kind. First of all securities with a twin and a combination of risk-free bonds to replicate real option, that is, do the following portfolios: the S N share price buy twin share, with the home straight on the phone to send flowers to borrow the amount of risk-free bond B the portfolio value of NS-B. A year later the corresponding value of the portfolio, there are two possibilities: First, with probability q into NS-(1 + r) B; one with probability 1-q into the NS-(1 + r) B. If the requirements of real options in the value of one year with the same value of the portfolio, namely: E + = NS + - (1 + r) B E = NS-(l + r) B By the above equation can be solved: N = (E +-E-) / (S + - S-) B = (NS, E-) / (1 + r) Therefore, under the assumption of no arbitrage opportunities, the current value of real options should be equal to the value of the portfolio: E = NS-B = [pE + + (1-p) E-&quot;/ (l + r) Of which: P = [(1 + r) S-S-] / (S +-S-) So long as we are given the possibility of real option value in the end, you can use on the expiration of the current value of type E. This example, the 0 in decision-making, cash flow, less than 11 million yuan to 10 million yuan and wait for it to give up after one year if favorable, while cash flow is 18 million yuan investment, income, E + = 1800-1100 ( 1 +0.08) = 612 million; the bad, the cash flow of 600 million, to abandon investment in E-= 0. Binomial option pricing model known by the risk-neutral probability p = [(1 + r) sS-] / (SS-) = [(1 +0.08) 20-12] / (36-12) = 0.4, then the project The value of C = [p * E + (1-p) E-] / (1 + r) = (0.4 * 612 +0.6 * 2) / 1.08 = 226.7 million, as C&gt; 0 it can not reject the project. Specific practices is the first non-Touzi, but can not veto the project, but should retain the project&#39;s investment rights or should 以 C = 226.7 million dollars in the right to sell the investment of the project. In summary, real options have option features, that is, the irreversibility of investment, time delay and selective investment in a variety of changes and flexibility, reflects real-life characteristics of investment projects, while the NPV method violated these characteristics; real option discount rate used for the risk-free interest rate, objective standards, but NPV rule or by using the weighted average cost calculated 风险报酬 率 CAMP, while the Japanese love to send flowers home to their homes and to increase with the uncertainty adjust the level of the discount rate, with considerable subjectivity; real options are the same as with NLPV method based on the estimated future cash flow basis, but more to the empirical real options to consider, a better understanding of the actual investment behavior. Therefore, real options should be evaluated and a more rational decision-making investment projects and more scientific methods.