What Are the Four Main Types of Real Options

question 12

Essay

What are the four main types of real options?

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Definitions:

Black-Scholes

A mathematical model used to estimate the theoretical price of European put and call options, considering factors such as risk-free rate, volatility, and time.

Instantaneous Risk-free Rate

The theoretical rate of return of an investment with no risk of financial loss, typically considered as a very short-term government bond yield.

Hedge Ratio

The ratio of the size of a position in a hedging instrument to the size of the position being hedged.

Strike Price

The price at which the holder of an option contract has the right to buy or sell the underlying asset.