Project Economic Valuation Using Asian Real Option Approach

Real option is a promising approach for valuation of projects especially under uncertainty conditions. However many researchers believe that the results of this approach cannot be completely relied, because real option overestimates value of inherent flexibilities in projects. The main reason for overestimation of the flexibilities is to apply valuation procedures of financial options in real options while these two options have some differences. In this paper, we apply Asian real option approach for valuation of projects in order to become more realistic. Asian option is a kind of financial option that its value, despite of ordinary options, depends on price variation of underlying asset during a period of time. This study utilizes binomial bushy tree for valuation of Asian option. Our proposed approach has been applied in a real project. As expected, the Asian real option estimates the value of flexibilities inherent in the project less than the plain vanilla option.