VALUE MAXIMIZING DECISION BY THE USE OF A REAL OPTION ANALYSIS IN CURRENT ECONOMIC CLIMATE
Keywords:Real Option Analysis, Monte Carlo Simulation, 3D Option Space, Risk Neutral Probability Based Analysis
AbstractEconomic climate in which companies operating Latvia have to make sound capital-budgeting decisions can be noted as an archetypical example of decision-making under uncertainty. Real Options Analysis (ROA), though not applied consistently, is still well-renowned all over the globe, but apparently neglected by Latvian companies. There are few academic works on the topic, yet none of the major companies in the Latvia have publicized ROA application. Overall aim of the research is to carry out Real Options Analysis, thereby identifying value maximizing decisions regarding the Business Unit of the Latvian Company. Having used Monte Carlo simulation, 3D Option Space and sensitivity analysis – Risk-Neutral Probability-based real options analysis, authors provided a solution to the company’s problem at hand. The flow chart of ROA application has been created which would be a useful “road map” as well as valuation tool for Latvian practitioners in time of economic uncertainty.