Learning Objectives
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# Learning Objectives - Understand option types and payoffs - Apply Black-Scholes and binomial models - Evaluate real options in capital budgeting ## 1. Option Basics **Call Option:** Right to buy at strike price.
Learning Objectives
- Understand option types and payoffs
- Apply Black-Scholes and binomial models
- Evaluate real options in capital budgeting
1. Option Basics
Call Option: Right to buy at strike price. Put Option: Right to sell at strike price.
Payoff at Expiration:
- Long Call: max(S - K, 0)
- Long Put: max(K - S, 0)
2. Black-Scholes Model
3. Real Options in Capital Budgeting
Types: Option to expand, abandon, defer, switch. Traditional NPV analysis ignores flexibility.
Q1: Call option, K=55 at expiration. Payoff?Payoff = max(55-50, 0) = 50, S=$45. Payoff?**Payoff = max(50-45, 0) = $5 Q3: What is a real option?Management's flexibility to alter decisions in response to new information (expand, contract, defer, abandon a project). Q4: Why is a real option valuable?It limits downside risk while preserving upside potential, increasing project value beyond static NPV. Join Discord PreviousWorking Capital ManagementNextMergers & Acquisitions