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Real Options Framework

3               Real Options Framework

3.1            Valuing Contingent Claims

3.1.1         Single State Variable

3.1.2         Two State Variables

3.1.3         Non-Traded Assets (With Below-Equilibrium Return)

3.1.3.1      Futures, Convenience Yield, and Non-Traded Assets

3.2            Expanded (Strategic) NPV Framework

3.3            Justification of the Options Analogy

3.4            Limitations of the Options Analogy

3.5            Strategic Questions for Capital Budgeting Analysis

3.5.1         Dimensions of Options-Based Classification

3.5.1.1      Example: Options Classification of Actual Cases