<< /S /GoTo /D (Outline0.2) >> Trees to Solve Real-Option Valuation Problems, Decision Analysis, v2, 69-88. The maximum of option values indicates which strategy should be chosen by the company. 3 0 obj << << /S /GoTo /D (Outline0.6) >> 22 0 obj Real options analysis applies to sequential decision-making under uncertainty. REAL OPTION ANALYSIS EXAMPLE 1 A company is considering investing in a project. endobj << /S /GoTo /D (Outline0.5) >> /Length 1258 endobj stream endobj The objective probability the market will go up is 20%. endobj zh{Hd[5۰%#�ߏ�վ�+�n�ʰH���ys� �#�NX&��$-���H�MGT��%O��T3�����^iWk}�f7����S�s���=R;+���w�iŚ?g�J���0�*��~�����������pV� VTm47Ҙ�\G��,Xnyp���[��/�3Z�ٰW���~{�L�{�~�� ! (6. %���� (1. 26 0 obj << /S /GoTo /D (Outline0.4) >> 29 0 obj endobj The discounted cash flow method does not always completely capture the uncertainty of . Value. 13 0 obj 21 0 obj endobj /Filter /FlateDecode �3���_k0t�ћè����=�J�iM6��� Wz9�� ��{�����i�:cA�ˣP�}B�U)?�E ?~ �Fz2Ǟ��I4�JU�$�E�uf��UZ� ��~��kY��������o�F@�����7��p�4265;���L���=`�f�,�!�&�'���&J�$�cJoY��������2�,�DSdV)��x�@�r��qD�]���@��BP%�M���c��f����DRˡ��LcKSJ�2W�'�z7�Ch��El�9P�2#���A�eY��h �~ �M����ku����Y�3�y��(`� �șէh�� They use the risk-neutral probabilities from the option pricing model in the decision tree to solve for the option’s value. endobj Real options analysis posits that the value of an option rises with increasing uncertainty in the underlying asset. (2. Stock Option Valuation Insights. h$ ��Oy���%���s�a=��=�L ��EL�K�t**m^`@�0.�3oRɁs���ʓ��Kӹ���` Real Options Analysis. His experience prior to joining KPMG included endobj << /S /GoTo /D (Outline0.1) >> endobj %PDF-1.5 the future financial performance of a business, business ownership interest, or security Real options are similar to financial options in that firms with discretionary investment opportunities have the right—but are under no obligation—to acquire expected cash flows by making an investment on or before the date that the (investment) opportunity ceases to exist. The next section uses two basic numerical examples to illustrate the application of real options valuation principles to mining and to R&D programs. 40 0 obj << A six steps framework for the resolution of a valuation problem using the binomial technique will be introduced. /Length 3400 /Filter /FlateDecode Value of portfolio today is φ0 = F0 −nP0 Value of a widget factory next year is V1 = ∞ ∑ t=0 P1/(1.1)t = 11P1 Robert Pindyck (MIT) LECTURES ON REAL OPTIONS — PART I August, 2008 19 / 44 The present value (PV) of future discounted expected cash flows is either 3000 if the market goes up or 500 if the market goes down next year. (3. x��WKo7��W���o�渪�"~I During his tenure both at Decisioneering and at KPMG Consulting, he consulted on real options and financial valuation for many Fortune 100 firms. endobj 17 0 obj 30 0 obj >> 18 0 obj Un ringraziamento speciale a mio papà Lorenzo, a mia mamma Paola Real Options Analysis can overcome their limitations. experience in econometric modeling, financial analysis, real options, eco-nomic analysis, and statistics. g��V���?�[0]l}۹. Introduction) To value option, set up risk-free portfolio as before. {|��]_���C��I\:����F$I&w=20LY��T��}e/d@���Ǡ�`w�&��;�02�D�_�Qa�#]����[METZ%���ֿҙQMM���࢞Z�x�*/ܳ�%k�"�N�!G)���{��:i�O�U��s��K2� ��w��I���� �Vx����r��,�5T+���w m`S�����ѩty�ԕ �U��24v�|ԋQ���T�tl�D/I�!��-x)�l����!�:P�@��VWJ�X�D�z�UZU���B�)䭮�7�B����Ɛ�v���v:�֨_�U�34��3p��仯��"bk>��P+�x@�. 25 0 obj Cost Uncertainty) Section 3 extends the analysis using basic Risky R\046D) (5. stream << /S /GoTo /D (Outline0.3) >> The appropriate risk-adjusted rate of return (cost of capital) is 25%. 34 0 obj 33 0 obj examples of proprietary investment decisions (options) under uncertainty, and later introduce the strategic dimension of competitive reactions. Real options analysis is an important aspect of capital budgeting, one of the central problems of corporate nance, where the goal is to gure out the fair risk-adjusted value of investment opportunities and to then decide which opportunities { if any { should be pursued. endobj Robert P. Schweihs. << /S /GoTo /D [35 0 R /Fit ] >> endobj �q�d�-Π�+0��>0JHǔ͛ns< g�kҢ�L����/��mD�NZ]�Qa��d!�E�����1� 14 0 obj Scale Versus Flexibility) Analogy to Financial Options) Examples of application of the method will precede the conclusions. The Economic Analysis of Real Option . %PDF-1.4 10 0 obj >> (4. Simple Examples) endobj xڕZK���ϯPr����7E�슷��ě�����*cHH��"e��q�|��n�8��4�~|�uc�~���(��2����qSě"*�8)6����o>|��4�~�a��n�f����m����.�jյ�I����}�Z�VJ4�i{R���jO���I�1mS�8�Rx��� �7�i��(�y��Qćb�Iq�V��]\n_���E�Uk��V���]'�6q�y�� X��6�4 �2& �����h[��Vp�ʋ���ߏ�4Ϸ��=(���w��t�&B��Y�6����M �E�ͳ�t٤��6����y��1�aS�i��'YPJ+޿w�a+a�$�*���a����ʗ�}�l,�!��>�j�P����&�E�wG��>Ӏ�Q��Ia~3��v�"��$���,4}���m�Z��,�#-�O � oS�c��>��2�졯x�{l�e�%�l�a�i_�h1�Y\� �� A�~�४:���5������Ǿ��῍�}4��I�f�t�p�;�۪k5�@zLA���ףb�XG)�س^5*��*�4��c�,@�d��^�p����%쯶k�O��hp�!JN�s�ۛ�c[���/�2�&ڵ�I0�l�ܡPW}א��3�z!�(�3���~������o; +ș��u��*K�����V��I�6�g{��ϪiX��kw"�������Un�Uw5�9W�츬X�#A`�K� ci%�J����nf�DZ>IM��@�4�y^�