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


Current working papers

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.

"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.

"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.