To be or not to be? That is ... a (real) option.

Prof. Jamie Sabal shared the story of Panchito in his blog. In brief, Panchito Eché is a citizen of Cuba. He managed to save a small amount of money and is considering starting a small restaurant in Havana. The return from the business is promising about 15%. However, Panchito will face another problem. He should keep government officers happy. In other words he should share his happiness (profits) with the officers. Thus the return will be 8 % annually. Panchito's cousin who lives in Miami, told him that the restaurant business usually yields 12%. Since Panchito´s restaurant will yield 8% the NPV would be negative and the idea of opening a restaurant would have to be rejected.Thus Panchito has no choice but to "save" his money under the mattress at 0% interest.

Prof. Sabal concludes that the "NPV rule applies virtually everywhere".

The entrepreneurship and ingenuity could not be killed by any political regime. Panchito deserves the respect of all entrepreneurs in the World. Keeping the money under the mattress at 0.00% yield has another risk. Panchito is likely to be a victim of a robbery. Thus, he will lose his savings. Runing his small business he diminishes the risk of a robbery. Moreover, the happiness of the government officers could be classified as transaction fees or a premium of a real call option. In other words, Panchito starting the small restaurant in Havana is buying a real call option. The Government (officers) sells and he buys the right but not the obligation to start a small restaurant. Cuba is developing. Panchito believes that one day he will run his restaurant as a free entrepreneur like his cousin from Miami and he takes the challenge, the risk, to open the restaurant.

Real options can be found everywhere. Panchito has the eyes to see the option for expansion and willingness to exercise it.