The American early exercise feature of the Real Option to invest in a new project is important in capital budgeting and project valuation. Closed form solutions for American, and therefore Real, Options are known for two special cases; an infinite horizon generates the Merton (Bell Journal of...

The continuous-time formula for expected payoff to holding an option, which nests several major pricing tools, is derived. It is shown also that under current market conditions the true exercise probability, N (d4), lies halfway between the two more familiar terms: N (d1) and N (d2).

Empirical pricing kernels for the UK equity market are derived as the ratio between risk-neutral densities, inferred from FTSE 100 index options, and historical real-world densities, estimated from time series of the index. The kernels thus obtained are almost compatible with a risk averse...