Amsterdam, June 4th, 2002
Portfolion Group
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Summary
I. II. III. IV.
why should CEOs worry about real wefts what argon they? Examples in Pharma, 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 discount rate, twin security Replicating portfolio and arbitrage arguments Methods to arrest care option value Pros and cons of each approach No word of honor of stochastic processes or stochastic control theory
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Sources: Copeland, Trigeorgis, Schwartz, Amram, Luenberger, Myers
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I. wherefore & What
Why should CEOs worry about real options
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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 well as financial options. Defer, expand, contract, relinquish a working class over time NPV analysis underestimates project value !
Every project has embedded real options CEOs pass on miss opportunities if they ignore option value In tender contests, a bidder needs to know full value of investment opportunity, for itself and for other bidders In screening investment opportunities, low luck projects incorrectly turn precedence over higher flexibility projects with increased risk. CEOs intuitively understand value of flexibility but there is a disconnect with CFOs that pre-dominantly use static DCF analyses
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I. Why & What
What is real about real options
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Financial options can be valued using arbitrage arguments Replicate pay-offs using can-do portfolio of traded underlying asset(s) and risk-free bond Since portfolio pay-offs are equivalent to option pay-offs in each state of nature, price is the same as well Real options have two unique characteristics around or all of the underlying asset(s) are not...If you want to get a full essay, order it on our website: Ordercustompaper.com
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