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Analyzing article for Derivatives Risk and Management Class.
Finance & Accounting
Pages 3 (753 words)
In everyday life, individuals always seem to be confronted with a lot of choices or options. Even choosing not to choose is still considered an option. In fact, as a person, what you have become today is merely a product of all decisions you have made from all the choices laid out to you in the past…
For mothers, they might have an option to be a plain housewife or to be a working mom. For working parents with meager income, they might have an option to start a new business and leave their jobs or to continue working for a company. All of these options seem to have a thing in common: uncertainty and the need of a decision. However, decisions are not made out of thin air; they have to be carefully woven and a well thought because any wrong move would affect the success of one’s own life. The question then is how to come up with a sound decision. In business sense, there are so-called financial options that give individuals the right, not an obligation to make a business decision---usually involving capital investments. Basically, there are two types of methods. One is the traditional method, commonly used is the net present value, which solely assess the financial value of the decision therefore ignoring any economic implications. The decision involved here will be very objective taking into account only the discount factors, cost of capital, etc. Using this method, if the computation produces a positive net present value, the investment must be pushed through. On the contrary, the second one, which is the real options method, is a modern approach to decision making. ...
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