Comparison of Real Options Analysis and Other Methods

Abstract

This chapter offers a comparison of the real options valuation approach, using the contingent claims approach, to two traditional valuation methods. The first traditional valuation approach discussed in this chapter is the NPV analysis, which also includes the contingent claims approach and the second is the decision tree analysis. Through this comparative study, it is shown when real options provide better results than traditional approaches. This will be illustrated on the basis of Copeland and Antikarov (2001) and these examples are further elaborated by the use of other literature.