Option Pricing and Applications in Capital Budgeting and Corporate Finance

In this course, we’ll look at the elemental features of basic call and put options and identify the factors which are the key determinants of option values. We’ll also look at the characteristics and methodology used to estimate option values: Black-Scholes and binomial option pricing models. In this course, we’ll also define the term “real option” and draw decision trees to represent alternative decisions and potential outcomes in an uncertain economy and describe three types of real options—timing, growth, and abandonment—and explain why it is important to consider those options when evaluating projects. We’ll explain how an investment for which a negative NPV is projected can have a positive NPV once any embedded real options are properly included in the evaluation as well as describe other methodologies businesses sometimes use to decide among investment projects: Equivalent Annual Benefit, Profitability Index and Hurdle Rate. We’ll wrap up the course with a look at the option equivalents of corporate securities and explain how any insights obtained can be used in determining optimal investing or issuance strategies. This course is part 4 of the New York Institute of Finance’s Corporate Finance & Valuation Methods Professional Certificate.