REAL OPTIONS
in THEORY and PRACTICE



All rights reserved.
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


Other journal articles

Recent research

"U.S. house prices: The role of
fundamentals" (with Lew Evans)
 This
paper uses a competitive-equilibrium
housing-market model to evaluate the
role that interest rates played in the US
housing boom and bust. The model
features stochastic construction costs,
disposable income, interest rates, and
population, and endogenously
determines the supply of developed
land and house prices. It is calibrated
separately to 95 cities and data on the
four state variables alone are used to
calculate house prices implied by
fundamentals for each city. Actual
prices during 1995-2010 closely match
the predicted prices implied by
observed changes in the four state
variables and reasonably small
perceived changes in the long-run
average levels of interest rates and
demand growth rates.

"The role of storage in a competitive
electricity market and the effects of
climate change" (with Lew Evans and
Andrea Lu)
 This paper uses a new
model of a competitive electricity
market to investigate the role of
storage in markets dominated by hydro
generation. Competition amongst
generators leads to an endogenous
shadow price of stored water, which
facilitates the efficient intra-day and
inter-season substitution of fuel.
Overall welfare depends on storage
capacity, the cost structure of non-
hydro generators, and the
characteristics of water inflows. If
climate change reduces the long-run
average level of inflows or leads to the
introduction of a carbon tax then
overall welfare will fall and the
profitability of generators will rise. The
welfare benefits from additional
storage capacity will increase if climate
change makes long-term inflows less
predictable or leads to the introduction
of a carbon tax. They will decrease if
average inflows fall or the predictable
seasonal cycle in inflows becomes less
pronounced.

"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.