Principles of Corporate Finance Essay

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Can you come up with an example of a real option that has the characteristics of simultaneous compound options? Please justify your choice. A real option with simultaneous compound options characteristics can be a call on call, a put on a put, a call on a put, and a put on a call. A somewhat generic example would be the completion of a project with multiple stages. The appearance, at first, would be that a simple option pricing model would be in use, but getting into the overall details, we’d see that there could be multiple stages where each stage could represent an option for the next stage. This type of generic example could be applied to any firm looking to expand into new geographic locations, or when developing a new production factory. Each of these scenarios could more than likely result in a multi-stage investment. For instance, if an American company sought to expand in a series of foreign markets in, say Asia, it could start by first entering into a single locale that is more prone to being supportive of foreign firms to gain valuable experience in international finance and marketing. This would give the firm the chance to mold their product or service to appeal more closely to the demographic. Once it perfected, or at least seriously improved its craft, it could then venture into further markets in the region. In this case, it could have built the second option off of the success of the first as at each stage it is not clear in the beginning whether or not each expansion will be successful. How about R & D at a pharmaceutical company? This company must first make an initial investment into research of a new drug, but if successful, the company will then have to make further investments to enhance the product and make sure safety and health concerns are fully addressed through clinical testing. Then, if clinical tests are successful, this

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