In this chapter we provide an overview of the new general theory of real options developed by Tang and coauthors. We define a real option as an investment project's managerial flexibility which grants the firm the right to choose new modes among a given finite set of modes to respond to the resolution of uncertainty over time. The choice must be made over a sequence of discretionary stopping times, and to change the mode of operation the firm must pay a cost. Mathematically, the problem of valuing a project involving real options and finding the optimal policy is formulated as an optimal control problem with discrete adjustment.
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