Exploring Interest Rate Dynamics on Real Option Valuation for Private Equity
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This study analyzes the impact of interest rates on real option valuation in private equity, a highly volatile sector. Unlike traditional models such as discounted cash flows (DCF) or internal rate of return (IRR), real options incorporate not only the discounting of future cash flows, but also the possibility of exercising or deferring the investment as expected returns change. Using the Black-Scholes model, the results show that interest rates significantly influence valuations: put options reveal potential losses and decline as interest rates increase, while call options remain practically stable. These findings suggest that real options provide a more comprehensive view of the impact of monetary policy on private equity investments and allow the valuation to incorporate the sector’s inherent uncertainty.
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