Big4WallStreet Finance Blog — binomial tree
Options and Real Options
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The “what if” dimension means that in case the new idea works out well, then the company might have significant value; otherwise, it will not.
For example, considering a mining company, in case explorations are successful, then the company will be valuable; if on the other hand explorations are not successful then the company might not even be surviving.
This is exactly how options work and we can use the same option pricing theory to value such real-world cases.