Executive Summary of A Real Option Framework for Business Application

Real options are useful tools for management. In our studies, we defined a real option as a contract or right to buy or sell something real at a specified price over a period in a narrow sense. We can create any types of real options by contracts. Real options are good for assets and huge projects with uncertain value changes. The writer company can hedge the value change risk of the underlying asset or project and get premiums from the buyer of the real option contract. The writer may use the money for developing a new product. While the buyer can get the preemptive right to buy or sell the underlying asset or project by paying the real option premium, which is far less than the actual value of the asset or project. That is, the buyer can invest in the asset or project with the limited risk of the real option premium. If the underlying asset or project is successful, the buyer can get unlimited profits. If the underlying asset or project is expected to fail, the buyer should ignore the paid premium. The definition of the real option in a narrow sense tells us that a variety of real options can be created by the contract and that a variety of real option valuation models can be developed case by case with the value change pattern of the underlying asset or project. In a strict sense, the Black-Sholes model is only for the financial options whose underlying assets have markets and the price movement follows the geometric Brownian motion. Our ROV model is for the general type of the real option whose underlying asset or project does not always have flexible movement, and shows only an approximate theoretical value. The real option has unlimited possibilities with limited risks in the real world. It can be ubiquitous in our daily lives, if it is widely used in the real world other than business. The real option could make our world more efficient, more effective, safer and more prosperous. It would change uncertainty, idleness, sleepiness and redundancy into money. It would create new businesses and new job markets. The specialist of the real option will sooner or later break new ground in the real world.