![]() ![]() An example of a put option is the case in which the producer has the ability to abandon or sell the property. The producer has the option to invest the development costs and receive the value of the reserves. In the oil/gas production business, the option to develop a field is similar to a call option. There are many types of real options that can be modeled as calls and/or puts or combinations thereof. The proponents of real options valuation (ROV) or real options analysis (ROA) argue, for example, that "option pricing methods are superior to traditional DCF (discounted cash flow) approaches because they explicitly capture the value of flexibility." Copeland and Antikarov even go so far as to assert, ".the net present value technique systematically undervalues everything because it fails to capture the value of flexibility." There is a certain amount of irony in comparing the assertions of ROV proponents in which traditional methods undervalue everything with the assertions of portfolio analysis proponents in which "conventional treatments of uncertainty contribute to overestimation of returns." (See Brashear, Becker, and Faulder, page 21.) Real options valuation/real options analysis Again, there can be European put options that are exercisable only on a specific date or American put options that can be exercised anytime prior to the expiration date. A financial put option is the right, but not the obligation, to sell a stock at a specified strike price. If the owner of the option can exercise the option at any time up to the expiration date, the option is referred to as an American option. If the option can only be exercised at the end of a specified period of time, the option is referred to as a European option. 4.4 Real options analysis in the E&P businessįinancial options include "calls" in which the owner of the option has the right, but not the obligation (thus, an option), to purchase a stock at a specified strike price. ![]()
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