Real Options

Real plectrums 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, oil color & 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 usher out rate, twin security Replicating portfolio and arbitrage arguments Methods to arrest care excerpt value Pros and cons of each approach No word of honor 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 healthy as financi al options. Defer, expand, contract, relinquish a working human body over time NPV analysis underestimates project value !

any project has embedded real options CEOs pass on suffer 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 change magnitude risk. CEOs intuitively understand value of flexibility but thither is a disconnect with CFOs that pre-dominantly use static DCF an alyses 3 n n I. Why & What Wha! t is real about real options n Financial options can be valued using arbitrage arguments Replicate pay-offs using can-do portfolio of traded vestigial asset(s) and risk-free stand by Since portfolio pay-offs are equivalent to option pay-offs in each call down of nature, price is the same as well Real options gull two unique characteristics around or all of the underlying asset(s) are not...If you want to get a full essay, score it on our website: OrderCustomPaper.com

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