Real Options Valuation

The Importance of Interest Rate Modelling in Theory and Practice

verfasst von: Marcus Schulmerich

Verlag: Springer Berlin Heidelberg

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

After the ?rst edition of this book was published in early 2005, the world has changed dramatically and at a pace never seen before. The changes that - curred in 2008 and 2009 were completely unthinkable two years before. These changes took place not only in the Finance sector, the origin of the crisis, but also, as a result, in other economic sectors like the automotive sector. Governments now own substantial parts, if not majorities, in banks or other companies which recorded losses of double digit billions of USD in 2008. 2008 saw the collapse of leading stand-alone U. S. investment banks. In many co- tries interest rates fell close to zero. What has happend? While the economy showed strong growth in 2004 to 2006, the Subprime or Credit Crisis changed the picture completely. What started in the U. S. ho- ing market in late 2006 became a full-?edged global ?nancial crisis and has a?ected ?nancial markets around the world. A decline in U. S. house prices and increasing interest rates caused a higher rate of subprime mortgage delinqu- cies in the U. S. and, due to the wide distribution of securitized assets, had a negative e?ect on other markets. As a result, markets realized that risks had been underestimated and volatility increased. This development culminated in the bankruptcy of the investment bank Lehman Brothers in mid September 2008.

Inhaltsverzeichnis

Frontmatter

1. Introduction

Abstract

Real options are one of the most fascinating research topics in Finance today. There are many reasons for this. First, the weaknesses of the Discounted Cash Flow (DCF) method, the most common valuation tool in Corporate Finance, have become more and more obvious to practitioners and are therefore putting pressure on academic research to improve traditional valuation tools. Second, literature on real options, especially the pricing techniques (which are mathematically and numerically much more savvy than classical methods like the DCF method, Internal Rate of Return method, or Payback Period method) have become more accessible to the broad public since the mid 1990s. This has sharpened the awareness for evaluating investment projects with the real ation tools. Third, the very volatile world economic situation (especially since mid 2007) and the even greater flexibility being built into investment projects calls for valuation tools that can incorporate this volatility and flexibility and model it accurately. As will be seen, traditional methods are not capable of doing this. This insight was the starting point of the research area real options in 1977 when Stewart C. Myers from the MIT Sloan School of Management published his pioneering article on the subject in the Journal of Financial Economics.

Marcus Schulmerich

2. Real Options in Theory and Practice

Abstract

In this chapter, the theory and practice of real options will be introduced. Although their application belongs to the field of Corporate Finance, the valuation methods origined in the option pricing theory for financial securities. In 1977, Stewart C. Myers introduced real options as a new area of financial research with the publication of his famous article on this subject. He also coined the term real option and, as a result, is often referred to as the father of real options theory.

Marcus Schulmerich

3. Stochastic Models for the Term Structure of Interest Rates

Abstract

This chapter is devoted to stochastic interest rate models. Since the 1970s stochastic interest rate models have played a central role in Finance, not only in research but also in practical applications. These models were immediately implemented by practitioners to accurately price financial securities, like interest rate derivatives. Their pricing, however, was mathematically far more demanding than equity pricing, due to the fact that the whole term structure of interest rates and its development over time was required.

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4. Real Options Valuation Tools in Corporate Finance

Abstract

In Chapter 4 the most common valuation methods for real options are presented in theory. These tools are implemented in the computer simulation program and will be used in Chapter 5 to price various real options by applying a non-constant interest rate which is modelled via the term structure models introduced in the previous chapter.

Marcus Schulmerich

5. Analysis of Various Real Options in Simulations and Backtesting

Abstract

In this chapter the real options valuation methods and stochastic term structure models introduced so far will be applied and numerically analyzed in five test situations for various real options, especially for the real options cases presented in Section 1.1.

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6. Summary and Outlook

Abstract

This book analyzed real options valuation for non-constant risk-free interest rates, especially for stochastically modelled risk-free interest rates, in simulation and historical backtesting. Since this is the second edition, its main purpose was to examine the validity of the findings of the first edition for many more analyzed historical backtesting scenarios and for a much longer time period than in the first edition. Several real options cases were investigated and combined with various pricing tools and stochastic term structure models. Additionally, preliminary tests were conducted to see how various choices of model inherent parameters (number of simulated short-rate paths, discretization parameters for the time and the state axis of pricing tools, etc.) influence the outcome of the respective pricing tool.

Marcus Schulmerich

Backmatter

Titel: Real Options Valuation
verfasst von: Marcus Schulmerich
Verlag: Springer Berlin Heidelberg
Electronic ISBN: 978-3-642-12662-8
Print ISBN: 978-3-642-12661-1
DOI: https://doi.org/10.1007/978-3-642-12662-8