Real Options in Strategic Management

Abstract

Real options theory begins by drawing an analogy between real options and financial options. A financial option is a derivative security whose value is derived from the worth and characteristics of another financial security, or the so-called underlying asset. By definition, a financial option gives its holder the right, but not the obligation, to buy or sell the underlying asset at a specified price (i.e., the exercise price) on or before a given date (i.e., the expiration date). Financial economists Black and Scholes (1973) and Merton (1973) pioneered a formula for the valuation of a financial option, and their methodology has opened up the subsequent research on the pricing of financial assets and paved the way for the development of real options theory.

Citation

Tong, T.W. and Reuer, J.J. (2007), "Real Options in Strategic Management", Reuer, J.J. and Tong, T.W. (Ed.) Real Options Theory (Advances in Strategic Management, Vol. 24), Emerald Group Publishing Limited, Leeds, pp. 3-28. https://doi.org/10.1016/S0742-3322(07)24001-X