By T. Arnold
Aimed at practitioners with no earlier services within the subject, this book helps readers build simple actual concepts types to assist in decision-making. Providing a pragmatic and informative procedure, the authors introduce uncomplicated likelihood theories, before placing those theories right into a real-world context.
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Additional info for A Pragmatic Guide to Real Options
From Firm B’s perspective, an opportunity is being sold that appears to be like a put option, however, the opportunity is sold at a specified price that is not above the value of Firm B. In reality, Firm B does not have a put option, but has the short position on the call option held by Firm A in which Firm B can be sold at a price that is at or below the value of Firm B (otherwise, Firm A will not exercise the option). e.. , like a short position on a call option in which the strike price is below the spot price).
63). 00. 3 displays the results of the “almost” completed binomial tree. 63 To complete the tree, the probabilities of the four six-month prices need to be calculated. 67%)3). 51, the probability calculation is more complicated because P(U) P(U) P(D) can occur in more than one way: two up moves followed by a down move, a down move followed by two up moves, and so on. To know how many different ways the sequence of two up moves and one down move can occur, use a binomial coefficient, ( kN ), in which N is the number of total time increments and k is the number of upward price movements: ( 32 ) = 3.
Square the deviation from mean) before calculating the mean. ” The larger the variance, the more suspect the mean as a predictor of future events. Often, the square root of the variance is taken as a similar measure for determining how good of a predictor the mean is of future events. 005 The variance and the standard deviation measure “risk” or “uncertainty” about the mean as a predictor of the future. Some will consider risk and uncertainty to be different, but such a difference is not an issue in this text.