Real Options in Theory and Practice: About the Author

REAL OPTIONS
in THEORY and PRACTICE

About the Author

Graeme Guthrie is a professor in the School of Economics and Finance at
Victoria University of Wellington, New Zealand. He has a PhD in mathematics
and has taught economics and finance since 1995. As a consultant he has
provided advice on a wide variety of issues in relation to agriculture,
electricity, gas, real estate, and telecommunications, much of it using real
options analysis. His research articles on real options have appeared in:
Journal of Finance; Journal of Financial and Quantitative Analysis; Journal of
Banking and Finance; and other journals. His research in other areas of
economics and finance has been published in: European Economic Review;
International Journal of Industrial Organization; Journal of Economic Literature;
Journal of Industrial Economics; Journal of Monetary Economics; Journal of
Money, Credit and Banking; and other journals.

Book

Real Options in Theory and Practice. Oxford University Press, New York
(2009).

Selected journal articles

"Holding onto your horses: Conflicts of interest in asset management"
(with Glenn Boyle and Luke Gorton). Journal of Law and Economics
(forthcoming).
"House prices, development costs, and the value of waiting". Journal of
Urban Economics 68(1), 56-71 (July 2010).
"Missed opportunities: Optimal investment timing when information is
costly". Journal of Financial and Quantitative Analysis 42(2), 467-488
(2007).
"Regulating infrastructure: The impact on risk and investment ". Journal
of Economic Literature 44, 921-968 (2006).
"Hedging the value of waiting " (with Glenn Boyle). Journal of Banking
and Finance 30(4), 1245-1267 (2006).
"The optimal design of interest rate target changes " (with Julian
Wright). Journal of Money, Credit and Banking 36(1), 115-138 (2004).
"Investment, uncertainty, and liquidity " (with Glenn Boyle). Journal of
Finance 58(5), 2143-2166 (2003).
"Open mouth operations " (with Julian Wright). Journal of Monetary
Economics 46(2), 489-516 (2000).

Other journal articles

"Learning options and binomial trees". Wilmott Journal: The
International Journal of Innovative Quantitative Finance (forthcoming).
"Estimating implied valuation parameters for illiquid assets " (with Glenn
Boyle and Neil Quigley). Accounting and Finance 49(3), 465-479 (2009).
"Carbon subsidies, taxes, and optimal forest management " (with
Dinesh Kumareswaran). Environmental and Resource Economics 43(2),
275-293 (2009).
"How options provided by storage affect electricity prices" (with Lew
Evans). Southern Economic Journal 75(3), 681-702 (2009).
"Assessing the integration of electricity markets using principal
component analysis: Network and market structure effects " (with Lew
Evans and Steen Videbeck). Contemporary Economic Policy 26(1), 145-
161 (2008).
"Electricity spot price dynamics: Beyond financial models'' (with Steen
Videbeck). Energy Policy 35(11), 5614-5621 (2007).
"Competing payment schemes " (with Julian Wright). Journal of
Industrial Economics 55(1), 33-67 (2007).
"Pricing access: Forward versus backward looking cost rules " (with
John Small and Julian Wright). European Economic Review 50(7), 1767-
1789 (2006).
"A dynamic theory of cooperatives: The link between efficiency and
valuation " (with Lew Evans). Journal of Institutional and Theoretical
Economics 162(2), 364-383 (2006).
"Incentive regulation of prices when costs are sunk " (with Lew Evans).
Journal of Regulatory Economics 29(3), 239-264 (2006).
"Payback without apology " (with Glenn Boyle). Accounting and Finance
46(1), 1-10 (2006).
"Reply to the comments of Duckworth and Lewis " (with Michael Carter).
Journal of the Operational Research Society 56, 1337-1341 (2005).
"Human capital and popular investment advice " (with Glenn Boyle).
Review of Finance 9(2), 139-164 (2005).
"Risk, price regulation, and irreversible investment " (with Lew Evans).
International Journal of Industrial Organization 23, 109-128 (2005).
"Cricket interruptus: Fairness and incentive in limited overs cricket
matches " (with Michael Carter). Journal of the Operational Research
Society 55(8), 822-829 (2004).
"Cash flow immediacy and the value of investment timing " (with Glenn
Boyle). Journal of Financial Research 26(4), 553-570 (2003).
"Testing the expectations theory of the term structure for New
Zealand" (with Julian Wright and Jun Yu). New Zealand Economic Papers
33(1), 93-114 (1999).
"User charges for internet: The New Zealand experience" (with Michael
Carter). Telecommunications Systems 6, 301-313 (1996).
"Recursion operators and nonlocal symmetries ". Proceedings of the
Royal Society of London, Series A 446, 107-114 (1994).
"More nonlocal symmetries of the KdV equation". Journal of Physics A:
Mathematical and General 26, L905-L908 (1993).
"Nonlocal symmetries of the KdV equation" (with Mark Hickman).
Journal of Mathematical Physics 344, 193-205 (1993).

Current working papers

"Evaluating real estate development using real options a nalysis ".
"A note on operating leverage and expected rates of return".
"Commodity price s and the option value of storage " (with Lew Evans).
"An intertemporal model of electricity m arket s with an a pplication to
climate c hange" (with Lew Evans and Andrea Lu).

Recent research

"A note on operating leverage and
expected rates of return"
Conventional wisdom is that greater
operating leverage increases
systematic risk and therefore leads to a
higher expected rate of return earned
by a firm's owners. This paper shows
that the relationship between
operating leverage and the expected
rate of return is actually non-monotonic
when allowance is made for the option
to abandon an unprofitable project: the
expected rate of return is an increasing
function of operating leverage when
the latter is low, but a decreasing
function when it is high. This
demonstrates the dangers in drawing
inferences from models that ignore the
flexibility embedded in typical
investment projects.

Download the paper

"An intertemporal model of electricity
markets with an application to
climate change" (with Lew Evans and
Andrea Lu) In this paper we introduce
a model of an electricity market and
use it to explore the effect of climate
change on electricity prices and output.
It has multiple generation fuels,
uncertain fuel availability, and storage
options. The model is formulated in
continuous time, which mimics the
many short trading periods common to
electricity spot markets. It properly
incorporates forward-looking generation
decision making.

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"Commodity prices and the option
value of storage" (with Lew Evans)
We incorporate a friction into the
standard competitive storage model of
commodity prices and derive equilibrium
storage policies and spot prices. The
friction introduces an element of
irreversibility to storage decisions,
which leads to periods when storage
operators do not trade in the spot
market and spot-price volatility is
substantially greater than normal. It
also drives a wedge between the spot
price and the market value of the
stored commodity. When the return on
storage is correctly measured using the
market value of the stored commodity,
instead of the spot price, the
convenience yield is zero except during
stock-outs. However, when the return
from storage is incorrectly calculated
using the spot price, the convenience
yield is nonzero in the no-trade
region.

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