REAL OPTIONS
in THEORY and PRACTICE
in THEORY and PRACTICE
All rights reserved.
One-day Executive Education Course
One way to organize a one-day course is to choose a single practical
example and use this example to illustrate the main topics in Real Options in
Theory and Practice: the construction and calibration of a tree for an
appropriate state variable; allowance for risk in the valuation procedure;
construction of decision trees; and the use of all of these components to
analyze the problem posed.
Session 1 (60 minutes) Introduction to real options and the basic modeling
approach.
Session 2 (120 minutes) Constructing the foundations of a real options
model.
Session 3 (120 minutes) Putting structure on the foundations.
Session 4 (60 minutes) Using and communicating the results of real options
analysis.
example and use this example to illustrate the main topics in Real Options in
Theory and Practice: the construction and calibration of a tree for an
appropriate state variable; allowance for risk in the valuation procedure;
construction of decision trees; and the use of all of these components to
analyze the problem posed.
Session 1 (60 minutes) Introduction to real options and the basic modeling
approach.
- The concepts of real options and managerial flexibility.
- Example: options involved in commercial real estate.
- High-level modeling issues. Basic model structure. Exogenous state
variable versus endogenous cash flows. Binomial trees. - Example: suitable state variables for commercial real estate
applications.
Session 2 (120 minutes) Constructing the foundations of a real options
model.
- Calibrating a binomial tree for the state variable.
- Example: the market value of office space.
- Fundamental valuation formula.
- Various risk-adjustment models.
- Example: risk-neutral probabilities for a real estate price index.
Session 3 (120 minutes) Putting structure on the foundations.
- Decision trees.
- Example: the option to develop vacant land in the CBD.
- Putting all the pieces together.
- Example: value a piece of vacant land in the CBD.
- Shrinking the step size to improve accuracy.
Session 4 (60 minutes) Using and communicating the results of real options
analysis.
- Outputs, such as hurdle rates, comparative statics.
- Creative ways to report the results.
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