# FAQ Number 1

## Is the Real Options Premium Important?

First the definition of real options premium:

**Real Options Premium = Real Options Value
- NPV**

Answer
with an analogy: Investments can be viewed as call options.

- You get an operating project V (like a stock) by paying the
investment cost I (exercise price)
- Sometimes this option has a time of expiration (petroleum, patents,
etc.), sometimes is perpetual (real estate, etc.).
- Suppose a 3 years to expiration petroleum undeveloped reserve. The
immediate exercise of the option gets the NPV

**NPV = V - I **

The options premium can be important or not, depending of the of the
project **moneyness**

Looking the call option chart is possible to see that, for high project
value, the option become deep-in-the-money so that the option premium
become zero at the point A in the picture. The point A is the threshold
level which is optimal the immediate option execise.

For moderate project values, as showed in the picture, the option
premium can be very important, and even higher than the NPV itself. For
out-of-money-projects, the option value is the only cause of a positive
value for the investment opportunity.

What is the most frequent moneyness situation?

In general moderate value project are more frequent, although the fewer "deep-in-the-money"
projects demand more attention for the corporations due to their
attractiveness. But even out-of-money projects integrate a corporate
portfolio of projects.

Hence, the answer to the FAQ is yes, except for "deep-in-the-money"
projects.

Go to the Next FAQ: 2) What are the effects of
interest rate, volatility, and other parameters in both option value and
the decision rule?

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