Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
Published in:
Financialization of the Commodities Markets: A Non-technical Introduction Read chapter Read first chapter

2015 | OriginalPaper | Chapter

Incorporating Managerial Information into Real Option Valuation

Authors : Sebastian Jaimungal, Yuri Lawryshyn

Published in: Commodities, Energy and Environmental Finance

Publisher: Springer New York

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

The adoption of real options analysis (ROA) by practitioners, despite being widely viewed as a superior method for valuing managerial flexibility, remains limited due to varied difficulties in its implementation. In this work, we propose an approach that utilizes cash-flow estimates from managers as key inputs and results in project value cash-flows that exactly match the arbitrarily distributed estimates. We achieve this through the introduction of an observable, but not tradable, market stochastic driver process which drives the project’s cash-flow, rather than modeling the project value directly. Our framework can be used to value managerial flexibilities and obtain hedges in an easy to implement manner for a variety of real options such as entry/exit, multistage, abandonment, etc. As well, our approach to ROA provides a co-dependence between cash-flows, is consistent with financial theory, requires minimal subjective input of model parameters, and bridges the gap between theoretical ROA frameworks and practice.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Technik"

Online-Abonnement

Mit Springer Professional "Technik" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 390 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Maschinenbau + Werkstoffe




 

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now
previous chapter Calibration of Electricity Price Models
next chapter Real Options with Regulatory Policy Uncertainty
Appendix
Available only for authorised users
Footnotes
1
This can be easily generalized to a project which pays out a continuous dividend.
 
2
In earlier versions of this work, we referred to this process as the market sector indicator.
 
3
In principle, it is possible to consider the cash-flow as a continuous stream of cash-flows, in which case (17a) would be modified to \(\mathit{dX}_{s} = (\mu -r)\pi _{s}\,\mathit{ds} +\sigma \,\pi _{s}\,\mathit{dB}_{s} +\varphi _{s}(S_{s})\,\mathit{ds}\). However, Managers rarely specify a continuous stream of cash-flows, and although operations can be viewed as providing income on a continuous basis, we opt to leave the cash-flows discrete as this is how managers typically estimate cash-flow streams.
 
4
Since we have diffusion processes driving the relevant dynamics.
 
Literature
1.
Ané, T., Kharoubi, C.: Dependence structure and risk measure. J. Bus. 76(3), 411–438 (2003)CrossRef
2.
Berk, J., Green, R., Naik, V.: Valuation and return dynamics of new ventures. Rev. Financ. Stud. 17(1), 1–35 (2004)CrossRef
3.
Borison, A.: Real options analysis: where are the emperor’s clothes? J. Appl. Corp. Finance 17(2), 17–31 (2005)CrossRef
4.
Carlos, J., Nunes, J.: Pricing real options under the constant elasticity of variance diffusion. J. Futur. Mark. 31(3), 230–250 (2011)CrossRef
5.
Carmona, R. (ed.): Indifference Pricing: Theory and Applications. Princeton University Press, Princeton (2008)
6.
Copeland, T., Antikarov, V.: Real Options: A Practitioner’s Guide. W. W. Norton and Company, New York (2001)
7.
Datar, V., Mathews, S.: European real options: an intuitive algorithm for the black- scholes formula. J. Appl. Finance 14(1), 45–51 (2004)
8.
Davis, M.: Option pricing in incomplete markets. In:Mathematics of Derivative Securities, pp. 216–226. The Newton Institute, Cambridge University Press, Cambridge (1998)
9.
Dixit, A., Pindyck, R.: Investment Under Uncertainty. Princeton University Press, Princeton (1994)
10.
Föllmer, H., Schweizer, M.: Hedging of contingent claims under incomplete information. In: Davis, M.H., Elliott, R.J. (eds.) Applied Stochastic Analysis: Stochastics Monographs, pp. 389–414. Gordon and Breach, London (1991)
11.
Grasselli, M.: Getting real with real options: a utility-based approach for finite-time investment in incomplete markets. J. Bus. Finance Account. 38(5&6), 740–764 (2011)CrossRef
12.
Henderson, V.: Valuing the option to invest in an incomplete market. Math. Finan. Econ. 1, 103–128 (2007)CrossRef
13.
Hugonnier, J., Morellec, E.: Corporate control and real investment in incomplete markets. J. Econ. Dyn. Control. 31, 1781–1800 (2007)MATHMathSciNetCrossRef
14.
Leung, T., Sircar, R.: Accounting for risk aversion, vesting, job termination risk and multiple exercises in valuation of employee stock options. Math. Financ. 19(1), 99–128 (2009)MATHMathSciNetCrossRef
15.
Metcalf, G., Hasset, K.: Investment under alternative return assumptions. comparing random walk and mean revertion. J. Econ. Dyn. Control. 19, 1471–1488 (1995)MATH
16.
Miao, J., Wang, N.: Investment, consumption, and hedging under incomplete markets. J. Financ. Econ. 86(3), 608–42 (2007)CrossRef
17.
Nelsen, R.B.: An Introduction to Copulas. Springer, New York (2006)MATH
18.
Oriani, R., Sobrero, M.: Uncertainty and the market valuation of R&D within a real options logic. Strateg. Manag. J. 29(4), 343–361 (2008)CrossRef
19.
Pham, H.: Continuous-time Stochastic Control and Optimization with Financial Applications. Springer, Berlin (2009)MATHCrossRef
20.
Sarkar, S.: The effect of mean reversion on investment under uncertainty. J. Econ. Dyn. Control. 28, 377–396 (2003)MATHCrossRef
21.
Trigeorgis, L.: Real Options: Managerial Flexibility and Strategy in Resource Allocation. MIT Press, Cambridge (1996)
22.
Tsekrekos, A.E.: The effect of mean reversion on entry and exit decisions under uncertainty. J. Econ. Dyn. Control. 34(4), 725–742 (2010)MATHMathSciNetCrossRef
Metadata
Title
Incorporating Managerial Information into Real Option Valuation
Authors
Sebastian Jaimungal
Yuri Lawryshyn
Copyright Year
2015
Publisher
Springer New York
Book
Commodities, Energy and Environmental Finance

Print ISBN: 978-1-4939-2732-6

Electronic ISBN: 978-1-4939-2733-3

Copyright Year: 2015

DOI
https://doi.org/10.1007/978-1-4939-2733-3_8