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Option Pricing models
In most real investment projects, with the operating flexibility to switch among different operating modes in response to the cycle market movements, the project cash flows are path dependents:
1) When the project includes only one source of uncertainty, this management flexibility can be easily dealt with using the widely known techniques for valuing real options such as finite difference and binomial methods
2) For more complex projects, where there are many uncertain state variables affecting the project value, the valuation process becomes more and more complex. In such cases, the valuator has to deal with the uncertainty of many variables simultaneously with different and complex stochastic processes, while conducting the real options valuation
Black & Scholes is not the only valuation tool available...
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