Application Of Real Options Approach In Investment Decision-making Of Real Estate Development

Real estate is pillar industry of our national industry and investment in real estate play a very important role in fueling economic growth. How to make the decision under uncertainty is the matter that developers care about and that need further research. Real option approach focus on researching the value of this uncertainty in investment theoretical research, which can help investor decision-making, and it has been applied to the research about real estate investment decision-making abroad and has become the frontier fields of real estate investment theory study.The core of this paper is to clarify that real option approach exists in investment decision of real estate and be valuable. So we should count its value in investment decision and research how much it is. The aim of the paper is to promote the application of real option method in real estate investment and improve the validity of real estate investment decision-making.This paper first reviews and researches the traditional investment decision theory of real estate investment, points out the defects of the traditional theory and method of real estate investment decision-making. Second, it expounds the real option basic conception and pricing theory in detail, focusing on analyzing the parameter of standard B-S real options pricing model and two-tree real options pricing model of deferring, expanding, contracting and abandoning options. Third, it analyzes real estate investment's real option character, summari2es the sort of real option in real estate field and discusses the real options analyzed framework of investment decision-making in real estate investment. At last it analy2es an example. Monte Carlo simulation in B-s model and VBA programmed in two-tree model is applied to option valuing process, and then make sensitivity analysis for calculated result.