Investors’ reaction to the government credibility problem: A real option analysis of emission permit policy risk

Developing the waterway infrastructure construction can improve the efficiency of energy utilization, reduce the energy consumption intensity and carbon dioxide emissions. Till the year 2020, China plan to complete 19,000 kilometers high grade channel. Construction of water infrastructure construction requires a large capital investment. However, the main financial source of funding the construction of transportation infrastructure at present in China is special financial allocation of the government. The unitary financing structure as well as the funding pressure has leaded to some serious financing problems. This paper applied the real options theory to the waterway infrastructure construction financing, analyzed the limitations of the NPV method and the advantages of real option method in investment decision of waterway infrastructure construction, and took an example to show its feasibility.

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A real option approach for the valuation of switching output flexibility in residential property investment

Journal of Financial Management of Property and Construction ◽

10.1108/jfmpc-05-2017-0017 ◽

2018 ◽

Vol 23 (2) ◽

pp. 133-151 ◽

Cited By ~ 2

Author(s):

Kwabena Mintah ◽

David Higgins ◽

Judith Callanan

Keyword(s):

Real Options ◽

Real Option ◽

Economic Value ◽

Management Tool ◽

Residential Property ◽

Option Valuation ◽

Content Type ◽

Real Option Analysis ◽

Real Option Valuation ◽

Mixed Use

Purpose Uncertainties in residential property investment performance require that real estate assets are designed in a flexible manner to respond to impacts of market dynamics. Though estimating the cost of flexibility is straightforward, assessing the economic value of flexibility is not. The purpose of this study is to explore the potential practical application of real option analysis to determine the economic value of a switching output flexibility embedded in a residential property investment in Australia. The study involves the exploration of an optimal strategy for investment in a residential development through real option analysis and valuation of a mixed use investment. Design/methodology/approach The real option valuation model developed by McDonald and Siegel (1986) is adopted for the evaluation because the switching output flexibility is likened to a perpetual American call option with dividend payout. Findings Through real option analysis, the economic value of switching output flexibility of the mixed use building was determined to be higher than the initial upfront costs. Moreover, a payoff of about $4million was determined to be the value of the switching output flexibility, therefore justifying upfront investments in flexibility as an uncertainty and risk management tool. Practical implications This application is an important demonstration of the practical use of options pricing techniques (real options analysis) and delivers further evidence needed to support the adoption of real option valuation in practice. Flexibility can also enhance risks and uncertainty management in residential property investment better than the adjustment of discount rates. Originality/value There is limited evidence on the use of real options techniques for the valuation of switching output flexibility in practice, and this comes as an original application; both the case study and data are all initial applications of switching flexibility in the Australian property market.

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Real option analysis in forest management decision making

Handbook of Forest Resource Economics ◽

10.4324/9780203105290-30 ◽

2014 ◽

pp. 357-368

Keyword(s):

Decision Making ◽

Forest Management ◽

Real Option ◽

Management Decision ◽

Real Option Analysis ◽

Management Decision Making

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