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The overparameterization in financial options renders the models useless in dealing with Real Options Analysis where...

The overparameterization in financial options renders the models useless in dealing with Real Options Analysis where flexibility is a prerequisite.

Discuss the validity or otherwise of the above assertion.

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Answer #1

The overparameterization is a method of predicting various situations which are occuring in financial options.

This method is act as precaution or giving some information about the decession that going to take in the finacial options. Real options methods are applied to quantify the value of management flexibility in the world of uncertainity. Real option is an important model for construct any portfolio which reflects the better options management. A real option itself is right but not obligation to undertake certain business related initiatives, such as deffering ,expanding, staging etc.The real option is not a substitute for discounted cash flow analysis it is is like a financial instrument whether the overparameterization is serves some assumptions or precautions. So we need both optional method to make decessions to overcome the hidden risk included in the business.

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