The real options approach to valuation - Haskayne School of Business

Solu*on Methods (2) • Par*al differen*al equa*on (PDE) – has closed form solu*on in very few cases • BS equa*on for European calls – generally solved by numerical methods • very flexible • good for American op*ons • for path dependencies need to add variables • not good for problems with more than three factors • technically more sophis*cated (need to approximate boundary condi*ons)