A binomial contingent claims model for valuing risky ventures

Recently techniques of continuous time arbitrage and stochastic control theory have been used to value risky ventures characterized by significant operating flexibility. While the advantages of these methods over the used discounted cash flow approaches have been well documented, implementation problems have emerged, primarily due to the immence mathematical and computational complexity inherent in these approaches and due to the fact that the methodology is not easily understood by management. This article uses a simple binomial framework which not only provides an easily understandable introduction to these, say, new methods, but also provides useful valuations in their own right.