Real Options

Real survival of the fittests Introduction Amsterdam, June 4th, 2002 Portfolion Group 1 Summary I. II. III. IV. why should CEOs worry about real wefts what argon they? Examples in Pharma, fossil oil & Gas, Semiconductors, Energy, Aircraft Current trends; quotes from Copeland, Myers, et al. What are differences between NPV analysis, ending Analysis, and Real Option Analysis? A quick overview. venture adjusted give notice rate, twin security Replicating portfolio and arbitrage arguments Methods to arrest care pickaxe value Pros and cons of each approach No word of take note of stochastic processes or stochastic control theory V. Sources: Copeland, Trigeorgis, Schwartz, Amram, Luenberger, Myers 2 I. wherefore & What Why should CEOs worry about real options n The right, moreover not the obligation, to take an action at a pre-determined cost (exercise price), for a pre-determined flow of time (time to expiration). Applies to strategic, as head as financial options. Defer, expand, contract, relinquish a working carve up over time NPV analysis underestimates project value !

each project has embedded real options CEOs pass on except opportunities if they ignore option value In tender contests, a bidder needs to know full value of investment opportunity, for itself and for separate bidders In screening investment opportunities, low luck projects falsely turn precedence over higher flexibility projects with increase risk. CEOs intuitively understand value of flexibility but there is a disconnect with CFOs that pre-dominantly use stati c DCF analyses 3 n n I. Why & Wha! t What is real about real options n Financial options can be valued using arbitrage arguments Replicate pay-offs using can-do portfolio of traded fundamental asset(s) and risk-free baffle Since portfolio pay-offs are equivalent to option pay-offs in each country of nature, price is the same as well Real options perplex two unique characteristics around or all of the underlying asset(s) are not...If you want to get a full essay, array it on our website: OrderCustomPaper.com

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