By T. Arnold

ISBN-10: 1137391162

ISBN-13: 9781137391162

ISBN-10: 134948301X

ISBN-13: 9781349483013

Aimed at practitioners with no earlier services within the subject, this book helps readers build easy actual suggestions versions to assist in decision-making. Providing a pragmatic and informative strategy, the authors introduce uncomplicated chance theories, before placing those theories right into a real-world context.

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Additional info for A Pragmatic Guide to Real Options

Example text

Possible lists of items due to there being only two choices for each item on the list. Why is this important? In a binomial tree which is similar to a decision tree, time is broken down into increments with two possible outcomes: the underlying asset value increases by a certain percentage or decreases by a certain percentage. As the time increments accrue, many combinations of price increases and decreases become possible for a given possible future underlying asset price. The binomial coefficient allows for the calculation of how many different combinations of price increases and decreases lead to a given possible future underlying asset price.

To eliminate redundancies in the N! possible lists of items due to there being only two choices for each item on the list. Why is this important? In a binomial tree which is similar to a decision tree, time is broken down into increments with two possible outcomes: the underlying asset value increases by a certain percentage or decreases by a certain percentage. As the time increments accrue, many combinations of price increases and decreases become possible for a given possible future underlying asset price.

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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A Pragmatic Guide to Real Options by T. Arnold


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