| Title |
A Study on Application of Real Options to Attract Financial Equity Investment in Real Estate Development |
| Authors |
Kwon Tae-In ; Lee Sang-Hyo ; Kim Jae-Jun |
| Keywords |
Real Estate Development ; Project Financing ; Financial Investor ; Real Options |
| Abstract |
The objective of the study is to seek methods to adopt abandonment option to reduce risk of a project failure, in order to attract financial equity investment for construction projects, many of which suffer from lack of funds. The analysis result indicated that according to the calculated input variables, the option value amounted to KRW 20.43 million. This value is subject to fluctuation due to strategic decision-making of financial investors and MD plans. It needs to be noted that strategic flexibility against risk of future uncertainty can be ensured by applying real option. The current analysis of project feasibility based on cash flow discount method cannot accurately take uncertainty of future value into account. Thus, it is incapable of efficient risk management. ‘Abandonment’option indicates buying a right to dispose real assets, and it enables strategic response even before the maturity of optionor when a problem rises to erode initially expected profit at maturity. In this study, value of the ‘abandonment’option is assessed. In reality, many risk factors need to be considered, and several options are likely to be combined. Therefore, it is necessary to conduct further research on valuation of compound options. |