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Definition: Real Options Luehrman SDG
Options as mentioned earlier give the owner the right but not the obligation. Financial options are derived from the financial assets such as securities, bonds etc. whereas real options are written for real assets such as real estate.
Real assets lack liquidity and it is hard to determine the price as price varies from one real asset to another. In other word a lot of uncertainty is associated with real assets which turn into high risk. Luehrman method provides us with the value of the managerial flexibility.
It helps us to predict to some extent about the future of the real assets among the uncertainty associated with it as mentioned as above. It tells us that the development associated with any of the real asset should be considered. For judging any real asset we have to see how much the area around the real asset has been developed.
For example If a real asset is located in an urban area then the uncertainty associated with the asset will be less as urban area is comparatively more developed than the rural area.
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