REAL OPTIONS
in THEORY and PRACTICE
in THEORY and PRACTICE
All rights reserved.
Four-day Post-experience Course
This course is taught intensively over two two-day periods. It combines
conventional lectures with several laboratory sessions. The computer labs
help to break up what would otherwise be a very intense program. The
material on calibration on the fourth day is chosen with the gas-field case
study in mind. If a different case study is used to complete the course then a
different collection of calibration techniques can be selected.
Day 1 Foundations
Session 1A (Lecture) Introduction to real options analysis: modeling
framework. Reading: Chapters 1-2.
Session 1B (Lecture) Valuation of single-period cash flows. Reading:
Chapter 3.
Session 1C (Lecture) Valuation of multi-period cash flows: backward
induction; shortcuts to valuation; portfolios of cash flows; annuities. Reading:
Chapter 4.
Session 1D (Lab) Valuation of multi-period cash flows (cont.): spreadsheet
implementation of the material covered in Session 1C. Reading: Chapter 4.
Day 2 Simple real options problems
Session 2A (Lecture) Combining valuation and decision making: a simple
investment timing problem; decision trees; dynamic programming. Reading:
Chapters 5-6.
Session 2B (Lab) Combining valuation and decision making (cont.):
spreadsheet implementation of the material covered in Session 2A. Reading:
Chapters 5-6.
Session 2C (Lecture) Simple timing options: investment timing; R&D timing.
Reading: Chapter 7.
Session 2D (Lab) Simple timing options (cont.): spreadsheet implementation
of the material covered in Session 2C. Reading: Chapter 7.
Day 3 More complicated real options problems
Session 3A (Lecture) Compound timing options: sequential investment;
resource extraction. Reading: Chapter 8.
Session 3B (Lab) Compound timing options (cont.): spreadsheet
implementation of the material covered in Session 3A. Reading: Chapter 8.
Session 3C (Lecture) More complicated option structures: time-to-build
problem; production-suspension problem. Reading: Chapters 9-10.
Session 3D (Lab) More complicated option structures (cont.): spreadsheet
implementation of the material covered in Session 3C. Reading: Chapters
9-10.
Day 4 Implementation
Session 4A (Lecture) Calibration: prices that follow a random walk; CAPM;
market values as state variables. Reading: Sections 12.1.1, 12.2.1, and 14.2.
Session 4B (Lab) Calibration (cont.): spreadsheet implementation of the
material covered in Session 4A. Reading: Sections 12.1.1, 12.2.1, and 14.2.
Session 4C (Lecture) Case study: Developing a gas field. Reading: Chapter
16.
Session 4D (Lab) Case study: Developing a gas field (cont.): spreadsheet
implementation of the material covered in Session 4C. Reading: Chapter 16.
conventional lectures with several laboratory sessions. The computer labs
help to break up what would otherwise be a very intense program. The
material on calibration on the fourth day is chosen with the gas-field case
study in mind. If a different case study is used to complete the course then a
different collection of calibration techniques can be selected.
Day 1 Foundations
Session 1A (Lecture) Introduction to real options analysis: modeling
framework. Reading: Chapters 1-2.
Session 1B (Lecture) Valuation of single-period cash flows. Reading:
Chapter 3.
Session 1C (Lecture) Valuation of multi-period cash flows: backward
induction; shortcuts to valuation; portfolios of cash flows; annuities. Reading:
Chapter 4.
Session 1D (Lab) Valuation of multi-period cash flows (cont.): spreadsheet
implementation of the material covered in Session 1C. Reading: Chapter 4.
Day 2 Simple real options problems
Session 2A (Lecture) Combining valuation and decision making: a simple
investment timing problem; decision trees; dynamic programming. Reading:
Chapters 5-6.
Session 2B (Lab) Combining valuation and decision making (cont.):
spreadsheet implementation of the material covered in Session 2A. Reading:
Chapters 5-6.
Session 2C (Lecture) Simple timing options: investment timing; R&D timing.
Reading: Chapter 7.
Session 2D (Lab) Simple timing options (cont.): spreadsheet implementation
of the material covered in Session 2C. Reading: Chapter 7.
Day 3 More complicated real options problems
Session 3A (Lecture) Compound timing options: sequential investment;
resource extraction. Reading: Chapter 8.
Session 3B (Lab) Compound timing options (cont.): spreadsheet
implementation of the material covered in Session 3A. Reading: Chapter 8.
Session 3C (Lecture) More complicated option structures: time-to-build
problem; production-suspension problem. Reading: Chapters 9-10.
Session 3D (Lab) More complicated option structures (cont.): spreadsheet
implementation of the material covered in Session 3C. Reading: Chapters
9-10.
Day 4 Implementation
Session 4A (Lecture) Calibration: prices that follow a random walk; CAPM;
market values as state variables. Reading: Sections 12.1.1, 12.2.1, and 14.2.
Session 4B (Lab) Calibration (cont.): spreadsheet implementation of the
material covered in Session 4A. Reading: Sections 12.1.1, 12.2.1, and 14.2.
Session 4C (Lecture) Case study: Developing a gas field. Reading: Chapter
16.
Session 4D (Lab) Case study: Developing a gas field (cont.): spreadsheet
implementation of the material covered in Session 4C. Reading: Chapter 16.
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