Real options cannot be valued using the risk-neutral method since real assets do not trade in a liquid market where prices are readily observable and arbitrage opportunities are exploited immediately.

Question

Quizplus · Accepted Answer

Real options can be valued using the risk-neutral method by creating a replicating portfolio or using other financial models that adjust for risk, despite the lack of a liquid market for the underlying real assets. This approach allows for the estimation of the value of options on real assets by assuming a world where investors are indifferent to risk.

Real Options Cannot Be Valued Using the Risk-Neutral Method Since