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Hi there
I am studying AFM using BPP workbook.
It has an example of valuing a Put option using black scholes formula.
Unlike valuation of a call option for Pa it is getting the PV of the estimated net cash flows after exercise of the option as the cost of the project plus the NPV. Should this not be the NPV less the cost for the net cash inflows?
Thank you
ElizaYes, that’s what I thought at first as well, but after some thought I realized we only exercise the Put option if the underlying asset value decreases, in the case of real options our put option is to abandon the project, and we will only do this if the future flows after the abandonment are expected to be lower hence they are the underlying assets and the put option is the strike price.
I am also studying AFM, so please take this with a grain of salt this is just my understanding of it.
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