Real Options 2019 1 Real Options 2019 Dean A.

Transcript:Real Options 2019 1 Real Options 2019 Dean A.:
Real Options 2019 1 Real Options 2019 Dean A. Paxson Chapters 1 & 2 Real Option Value Introduction to Real Options Real Options 2019 2 Chapter 2 #1 Simple One Step Real Calls & Puts Practical Real Estate Case Study #2 European options #3 Exercises #4 Problems (Laptop Exercises) Real Options 2019 3 INTRODUCTORY TOPICS COVERED One Step Simple Option Pricing Model European-style options Deferral Expansion (Follow Up Investments) Abandonment Contraction Switching Outputs or Inputs Real Options 2019 4 INTRODUCTION Real Options: Why Options? Because the holder is given the right but not the obligation to choose the alternative that best suits her interest; Why “Real”? Because they relate to real assets instead of financial assets Often concerns “intangibles” of corporation =no immediate +cash flow Real Options 2019 5 INTRODUCTION The value of real options depends on six variables: Value of the underlying asset; Investment cost; Time to maturity (expiration); Volatility in the value of the underlying asset; Risk free interest rate; and Expected dividends paid on the underlying asset, or other “deemed” payouts during project. Real Options 2019 6 CORPORATE OPTIONS Different types of “Real Options”: 1 - The opportunity to “wait” and invest later (defer); 2 - The opportunity to abandon a project; 3 - The opportunity to scale back (contract) a project; 4 - The opportunity to make follow-up investments (expand); 5 - The opportunity for the firm to switch its output or production state or inputs; Real Options 2019 7 CORPORATE OPTIONS 6 - The opportunity to extend the life of a project; 7 - The opportunity to make phased investments (compound option); 8 - The opportunity to make investments where possible to choose the best of several assets (tenant choice and mixed uses). Project Value =“Real Option” + NPV if operating Real Options 2019 8 V=current asset value, K=exercise price Probability Up = p = (a - d)/(u - d) Prob Down = 1 - p a = ert u = eσ √t U= max[u*V-K,0] d =e-σ √t =1/u D=max[d*V-K,0] t = time intervals as % of year U’= max[K-u*V,0] D’=max[K-d*V,0] Call option = e(-r t)*[p*U+(1-p)*D] Put option = e(-r t)*[p*U’+(1-p)*D’] ONE STEP OPTION PRICING MODEL Real Options 2019 9 One Step Call Option Real Options 2019 10 One Step Put Option Real Options 2019 11 CONSTRÓI CASE STUDY CONSTRÓI, SA, a real estate developer based in the north of Portugal, can start a housing