In the last decades, a vast body of literature has arisen on real option analysis (ROA). The use of di¤erent approaches and the often implicit adoption of major assumptions may cause confusion on what ROA precisely entails, or in which situations it may be applied. We assess the �eld of real option analysis by explicitly linking ROA to the basic principles of option pricing theory and the replicating portfolio concept. From this perspective, we explain how real options adjust to the varying risk pro�les of a project, a feature not available in other valuation methods. We also clarify how non-market risks can be dealt with in ROA. We show that a combination of option pricing and decision tree analysis enables us to treat a broad range of investment problems, in a manner that is consistent with pricing theory.
|Publication status||Published - 2013|