bsop real option valuation -option to delay

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December 30, 2020 at 6:11 pm #601195
Agata
Participant
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With the delay option, Pa is the sum of discounted cash flows but we do not discount the Pe to a point in time when it is being delayed?
December 31, 2020 at 8:17 am #601205
John Moffat
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In the formula, Pe is multiplied by e^(-rt) and this is in fact discounting Pe on a continuous basis (i.e. day by day rather than yearly as usual with discounting).

So it is being automatically discounted which is why we don’t need to discount it again 🙂
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