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Erschienen in:
Financialization of the Commodities Markets: A Non-technical Introduction Kapitel lesen Erstes Kapitel lesen

2015 | OriginalPaper | Buchkapitel

Incorporating Managerial Information into Real Option Valuation

verfasst von : Sebastian Jaimungal, Yuri Lawryshyn

Erschienen in: Commodities, Energy and Environmental Finance

Verlag: Springer New York

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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.

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Vorheriges Kapitel Calibration of Electricity Price Models
Nächstes Kapitel Real Options with Regulatory Policy Uncertainty
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Fußnoten
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.
 
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Metadaten
Titel
Incorporating Managerial Information into Real Option Valuation
verfasst von
Sebastian Jaimungal
Yuri Lawryshyn
Copyright-Jahr
2015
Verlag
Springer New York
Buch
Commodities, Energy and Environmental Finance

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

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

Copyright-Jahr: 2015

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