Real options and interactions with financial flexibility

Abstract

This paper has two main goals. First, it provides a comprehensive overview of the existing real options literature and applications, and presents practical principles for quantifying the value of various real options. Second, it takes a first step towards extending the real options literature to recognize interactions with financial flexibility. The comprehensive literature review traces the evolution of the real options revolution, organized around thematic developments covering the early criticisms, conceptual approaches, foundations and building blocks, risk-neutral valuation and risk adjustment, analytic contributions in valuing different options separately, option interactions, numerical techniques, competition and strategic options, various applications, and future research directions.