Areas where traditional Discounted Cash Flow are used: Traditional Discounted Cash Flow is mostly articulated as a Net Present value (NPV) which has three short versus option theories which are flexibility, contingency and volatility…..
Flexibility: This is the ability to expand, abandon, contract and defer an investment. Net profit value does not factor the value of uncertainty and also it is inherent less robust than the options approach when used to value flexibility….
Binomial Option Pricing Model: This type of the model is the one which is currently widely used real option valuation method. The model usually describes the price movement over time which the assets value moves to two or one possible price which is associated with probability. It is widely used because it handles a variety of conditions which most of the other models cannot be applied…..
In conclusion the Gamma and Delta are extensively used in hedging operations. Third Greek is the Vega; it is used in hedging operations to measure the shift in prices of option given a one percentage shift in respective stocks’ volatility. Theta is another Greek used in option pricing and measures the shift in option prices given a change (usually a decrease) in the option’s period of expiration. Another Greek is Rho, which measures the shift in option prices given a one-percent change in interest rate (the risk free ones).
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