REAL OPTIONS
in THEORY and PRACTICE
in THEORY and PRACTICE
All rights reserved.
For Practitioners
Sample Mathematica code
The CD that accompanies Real Options in Theory and Practice contains
spreadsheets for all of the numerical examples contained in the book.
However, the notation in the book has been chosen to make it as easy as
possible to implement real options analysis in a wide variety of programming
languages. The following three files show how real options analysis can be
implemented using Mathematica. (The programs involve just a series of FOR
loops, so translation into other languages is straightforward.)
without access to Mathematica can still view the contents -- the code, as well
as outputs corresponding to the parameters used in the book -- using the
free Mathematica Player, which can be downloaded here.
Some practitioner-focused papers by the same author
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.
Evaluating real estate development using real options analysis
This paper describes a simple method for using real options analysis to
evaluate commercial real estate projects when development can be
suspended. The approach described can be applied to projects at any stage
of construction, which is especially useful when market conditions are poor
and suspension of many partly-completed projects is being considered. All
the calculations can be performed in a spreadsheet and only one parameter---
the volatility of the price of a completed project---needs to be estimated in
addition to those required for static DCF analysis.
Cost-benefit analysis: Allowing for flexibility
This paper explains how to use cost-benefit analysis to evaluate projects in a
way that correctly allows for investment irreversibility, uncertainty about
future outcomes, the ability to learn about those outcomes prior to
committing to a project, and the ability to delay decisions. It uses real options
analysis to value projects' embedded flexibility and to determine how that
flexibility can be exploited. The approach is demonstrated using a
hypothetical investment in transport infrastructure.
[===Coming soon===]
The CD that accompanies Real Options in Theory and Practice contains
spreadsheets for all of the numerical examples contained in the book.
However, the notation in the book has been chosen to make it as easy as
possible to implement real options analysis in a wide variety of programming
languages. The following three files show how real options analysis can be
implemented using Mathematica. (The programs involve just a series of FOR
loops, so translation into other languages is straightforward.)
- Chapter 15: Forestry Management and Valuation
- Chapter 16: Developing a Gas Field
- Chapter 17: Mothballing an Ethanol Plant
without access to Mathematica can still view the contents -- the code, as well
as outputs corresponding to the parameters used in the book -- using the
free Mathematica Player, which can be downloaded here.
Some practitioner-focused papers by the same author
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.
Evaluating real estate development using real options analysis
This paper describes a simple method for using real options analysis to
evaluate commercial real estate projects when development can be
suspended. The approach described can be applied to projects at any stage
of construction, which is especially useful when market conditions are poor
and suspension of many partly-completed projects is being considered. All
the calculations can be performed in a spreadsheet and only one parameter---
the volatility of the price of a completed project---needs to be estimated in
addition to those required for static DCF analysis.
Cost-benefit analysis: Allowing for flexibility
This paper explains how to use cost-benefit analysis to evaluate projects in a
way that correctly allows for investment irreversibility, uncertainty about
future outcomes, the ability to learn about those outcomes prior to
committing to a project, and the ability to delay decisions. It uses real options
analysis to value projects' embedded flexibility and to determine how that
flexibility can be exploited. The approach is demonstrated using a
hypothetical investment in transport infrastructure.
[===Coming soon===]
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