FNCE30002 Lecture 7: Real Options Analysis
TopicFRealoptionsanalyismmunn
TheVaureofuncentanity
Volatility Inthevalueofanoption the
payoffisasymmetric
lanesare limited butprofitisnot
Nhlfailsto accountforthe valueofflexibility
Gaampusofrealoptionsioptiontoinvertldelayinvertment
long call forfirm Options
havemastvalue NP
V
borderline
Exercise
price upfrontinv Difflolwintrinsicadoption
value
Valueof
assetis PVofnetce influenced
bytrinetoesopingIt d
Optionpremium pricetoestablish
option volatilityLt
LoptiontoexpandoperatiansN
hang call
Valueof ant is PV
ofincrementalnetCE Cieextra ce
fromexpansion
3
OptiontoabandanoperationsC
hangput
Exercise
price salvagevalue
Valueofassetis PVofnet CFfromcontinuedoperations
learlyburianofanoption
optiontoinvert mayenemireearlytoavoid
miningout on CF
from
project
Optiontoabandon exerciowhenPVofce
from
operations is
farbelow
thesalvage
value
Valuationaffealoptians
DecirianTreeapproact
Utilize Addecisiontreetoestimate
projectvalue
Remove
option
fromthree
adrevalue
Diff btw disapprox value oftherealoption
CAUTIONThisisonlyan approximation as it onlyallows
foradiscreterange
ofoutcomes
levidence on Real Options
taunitent WImgmtunderstandingimportance
of
realoptions
Mgmt was discount
rates wAll to overpenahieprojectsforreduced
flexibility
Not amper
popularpracticebecame
ofcomplexity difficulty inmodelling
mik dthe
encouragementofink taking
Realoptions are wilful in situations whighflexibilityvalue