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BSOP real options PE

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › BSOP real options PE

  • This topic has 3 replies, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • November 22, 2016 at 8:20 pm #350751
    Mark
    Member
    • Topics: 8
    • Replies: 30
    • ☆

    HI,

    Been practicing using BSOP to value real options and this has led me to question why we use the NPV of the cashflows for PA but we don’t discount the PE value for the price of exercise, despite making the assumption that the option is a european style option and is thus only exercisable on a future set date- thus in real terms the value for PE will also be affected by the time value of money and makes sense (for me atleast) to discount this too..

    Can’t get my head around this, wondering if you could explain the reasons behind it..

    November 23, 2016 at 7:40 am #350891
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54681
    • ☆☆☆☆☆

    In the BSOP formula, Pe is multiplied by e^(-rt).
    This is effectively discounting Pe (it is discounting it on a continuous basis as opposed to just yearly discounting as we do in ordinary NPV questions).

    November 23, 2016 at 6:46 pm #351046
    Mark
    Member
    • Topics: 8
    • Replies: 30
    • ☆

    Ahhh thank you so much John, that explains it!

    Thanks

    November 24, 2016 at 4:23 am #351114
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54681
    • ☆☆☆☆☆

    You are welcome 🙂

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    Posts
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