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

"Learning options and binomial
trees"
 This paper modifies the
standard binomial option pricing
approach to real options analysis so
that it can incorporate learning options.
These options allow a manager to
gather information about a potential
investment payoff prior to investment
occurring. The project's overall volatility
will vary in the run-up to investment,
being higher when the manager can
learn more about the eventual
investment payoff. This paper shows
how to construct a recombining tree for
the project's anticipated value by
making the time steps shorter during
periods of high volatility. It describes a
simple scheme for calculating the
lengths of these steps and the risk-
neutral probabilities that are needed to
calculate arbitrage-free asset prices.

"House prices, development costs,
and the value of waiting"
 This paper
demonstrates that new house prices
can exceed direct development costs
by considerable margins in competitive
housing markets with finite price-
elasticities of demand and no restrictive
land-use regulation. The premium
reflects the value of the option to delay
developing the marginal piece of
undeveloped land. Competition
amongst landowners reduces the
option value relative to the standard
open-city framework, but---as long as
undeveloped land is heterogeneous---
does not reduce it to zero. Calibrating
a special case of the model to U.S. data
suggests that the premium is
economically significant. In addition to
proving that prices can exceed costs
without regulation, this paper shows
that the relationship between volatility
and the rate of investment is more
complicated than previously thought.

"Commodity price behavior resulting
from transaction-cost frictions" (with
Lew Evans)
 This paper presents a
competitive storage model of
commodity prices that includes
transactions costs and derives the
spot, forward and stored commodity
price processes that it implies. These
costs introduce an element of
irreversibility into storage decisions and
result in periods during which
speculators do not trade in the spot
market even though total storage is
positive. As a result, in these periods
the market value of the stored
commodity can diverge from the spot
price. This price separation leads to the
existence of an endogenous
convenience yield, which is the
expected excess return on a real
option embedded in each unit of the
stored commodity.  We conclude that
linear transaction costs have
considerable explanatory power for the
behavior of spot and forward
commodity prices.