An Application Research Of Real Options Theory In Real Estate Investments

The Real Estate industry is one of the backbone industries in national economy related to all people's livehood and welfare. In addition to the value-in-use of general products, the Real Estate has some attribute of investment properties. The development of Real Estate project is charactered of long process, multiple-industry cooperation, long cycle and substantial uncertainty, which makes risks unavoidable. As a result, it is necessary to utilize effect analysis tools that are not only able to measure profitability properly, but also handle risks well.The Real Options theory has been gradually developing and improving as an independent body of knowledge out of financial option since 1970s, and become widely applied in investment analysis. The application fields of RO approach has been spreading from initial nature resource development into enterprise operation, IT project, Biopharmaceuticals, manufacture industry and so on, together with more and more attention from both academia and industrial circles. The RO theory amended the problem of under-estimating the value of investment opportunities caused by ignoring decision flexibility's value, and obviously it is more suitable for investment analysis under uncertainty.This article will systematically introduce the core concept and basic math models of RO theory, and try to profile and identify the risks of Real Estate investment, and estimate the actual value with the aspects of RO approach. Furthermore, two math models of option-pricing will also be introduced: the B-S model under continuous time assumption and Binomial Lattices approach under discrete time assumption. In the end, we will calculate the RO value of a concrete case on the basis of its investment estimation data, verifying the validity of these models.