European Real Options: An Intuitive Algorithm for the Black-Scholes Formula

@inproceedings{Datar2005EuropeanRO,
  title={European Real Options: An Intuitive Algorithm for the Black-Scholes Formula},
  author={Vinay T. Datar and Scott H. Mathews},
  year={2005}
}
We propose an intuitive method that is algebraically equivalent to the Black-Scholes formula. The main advantage of this method is its simplicity and transparency. Further, the method implicitly adjusts the discount rate to account for the underlying risk. Our approach relies on information that is available in the traditional project analysis using the net present value technique. When Black-Scholes assumptions are compromised in real projects, our method may provide a better approximation of… CONTINUE READING

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