Title: International capital budgeting using option pricing theory
Authors: Sercu, Piet ×
Uppal, R #
Issue Date: 1994
Series Title: Managerial Finance 1994 vol:20 issue:8 pages:3-21
Abstract: Typically, international capital budgeting is carried out using the adjusted net present value (NPV) approach. An alternate method for valuing international investments is based on the option pricing theory developed by Black and Scholes (1973). It is shown that when the decision being valued involves an irreversible investment, the investment decision can be postponed, and uncertainty is resolved gradually over time; using the option pricing approach may be more appropriate than the NPV approach. Option pricing techniques to value investment projects rely on finding appropriate financial instruments that can be used to replicate the cash flows from the project. Valuing international investment projects using option pricing techniques directly takes into account the option features contained in investment decisions and is easy to apply when the primary source method involves finding a set of risk-adjusted probabilities from the prices of traded securities. These probabilities can then be used to find the expected value of the risky cash flows from the project, and the present value of this expected cash flow can be calculated using the riskless discount rate
Publication status: published
KU Leuven publication type: IT
Appears in Collections:Research Center International Finance, Leuven
× corresponding author
# (joint) last author

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