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International Financial Management Mahesh Kumar Sarva, Lovely Professional University
Notes Unit 14: Real Options and Cross-border Investments
CONTENTS
Objectives
Introduction
14.1 Types of Real Options
14.1.1 Options Relating to Project Size
14.1.2 Options Relating to Project Life and Timing
14.1.3 Options Relating to Project Operation
14.2 Valuation
14.2.1 Applicability of Standard Techniques
14.2.2 Options-based Valuation
14.2.3 Valuation Inputs
14.2.4 Valuation Methods
14.3 Foreign Direct Investments
14.3.1 Why do Firms Invest Abroad?
14.4 Methods to Increase Cross-border Investments
14.5 Summary
14.6 Keywords
14.7 Review Questions
14.8 Further Readings
Objectives
After studying this unit, you will be able to:
Explain the types of real options
Discuss the valuation methods
Explain foreign direct investments
Discuss the methods to increase cross border investments
Introduction
Real options, sometimes also referred to as strategic options, are a tool that can be employed in
capital budgeting analysis to help companies make better critical strategic decisions. As with
financial market traded options, real options can be valued using pricing models. Real options
give the holder the right but, importantly, not the obligation, to take a particular course of
action. Real options are a mechanism by which a business can attempt to place an actual value on
the choice of taking a particular option, and can play a valuable role in helping a company assess
the financial implications of various strategic options. Real options are commonly used when
dealing with the decision to initiate a new project or to abandon an existing project, depending
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