Option Contract Pricing Model for Real Option with Right to Sell/Purchase the Project

Abstract

The study in the article aims to improve the methodology for calculating the price of an option agreement. The subject is calculating the price of the option agreement for a real option with the right to sell/purchase. The hypothesis is that using a more objective calculation formula will increase the efficiency of making the corporation’s strategic investment and management decisions. The method of mathematical modelling is used to refine the methodology for calculating the price of an option agreement within the framework of the ways of real options and discounting cash flows. The article justifies and clarifies the calculation formulas for the price of an option agreement for a real option with the right to sell/purchase. It has been shown that an objective assessment of the value of this option is a powerful tool for making a strategic investment decision. The article’s novelty is the combination of the practice of hedging standards for transactions and methods of real options and discounting cash flows when developing a model for calculating the price of an agreement. The application of a more objective pricing formula for an options contract, limited to the specified project profitability index, confirms the hypothesis. A more objective assessment of the effectiveness of projects with the application of real options is a competitive advantage of the corporation due to the ability to benefit further from risk and uncertainty. The direction of future research is the formalization of the option pricing model for calculating net assets.

Keywords

• economics
• real option
• assessment model
• investment project
• strategic decision
• option contract