Differentiate how real options are different from financial options on the basis of following four points: (i) Underlying Asset (ii) Pay-off (iii)…

Basis Financial Options Real Options Underlying Have underlying assets that are normally traded in the market i.e. shares, stocks, bonds, commodity etc. Have underlying the projects that are not traded in the market. Pay-off In most of the cases it is specified in the contracts and hence is fixed. It is estimated from the project cash flows and hence can be varied. Exercise Period Mostly the period of these options is short and can go maximum upto 1 year. The period of these options mostly starts from the end of 1st year and higher than the Financial Options. Approach Since these options are normally traded in the market they are “Priced”. Since these options are used to make decisions, they are "Valued".