Table 4 Main pros and cons of the four methods of real options valuation methodologies (Bogdan and Villiger 2010)
Method | Advantages | Disadvantages |
|---|---|---|
Formula | Easy to use | Calculation process not visible |
Fast | Only for simple option structures | |
Sensitivities | Simple assumptions | |
Trees | Easy to understand | Rigid |
Visualisation | ||
can deal with more complicated options | ||
Simulations | Easy to understand | Time consuming |
Visualisation | Problems with path dependency | |
Can deal with more complicated assumptions | ||
Finite differences | Can deal with more complicated assumptions | Calculation process not visible, hard to understand |
Can deal with more complicated options | Technically demanding |