REAL OPTIONS
in THEORY and PRACTICE
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
Selected journal articles
Other journal articles
Current working papers
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
- "House prices, development costs, and the value of waiting". Journal of
Urban Economics (forthcoming). - "Holding onto your horses: Conflicts of interest in asset management"
(with Glenn Boyle and Luke Gorton). Journal of Law and Economics
(forthcoming). - "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
- "Estimating implied valuation parameters: Extension and application to
ground lease rentals" (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
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.
"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.
- Download the paper
"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.
- Download the paper
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