Project portfolio valuation using real options

2020 ◽  
Vol 13 (2) ◽  
pp. 126-146
Author(s):  
A.B. Lanchakov ◽  
S.A. Filin ◽  
A.Zh. Yakushev
Keyword(s):  
Real Options ◽  
Real Option ◽  
Project Portfolio ◽  
Risk And Uncertainty ◽  
Expected Effect ◽  
Investment Projects ◽  
Financial Options ◽  
Portfolio Efficiency ◽  
The Face ◽  
Effective Development

Subject. The article analyzes the expected effect of a portfolio of projects in the face of risk and uncertainty, when using real options. Objectives. The purpose is to offer a more objective formula to assess the expected impact of a portfolio of projects for real investment objects under risk and uncertainty, using real options, and provide recommendations for improving the portfolio efficiency. Methods. The study draws on methods of real options and evaluation of investment projects through the real option value, the cash flow discounting method, synthesis, and mathematical modeling. Results. We systematized the main types of real options and developed a formula for calculating the expected effect of project portfolio implementation. The said formula shows that considering the additional long-term costs embedded in a portfolio of real options, which are associated with the use of these real options, and, therefore, reducing the overall risk of projects and the entire portfolio, permit to improve the objectivity of such calculations. Conclusions. When analyzing real options that have real assets as underlying instruments, it is often impossible to apply the computational formulae for financial options, as they differ significantly. The systematization of the main types of real options helps expand the range of application of management solutions. The offered formula enables to improve the efficiency of project insurance under risk and uncertainty and to use additional opportunities for effective development of the company.

scholarly journals Evaluating a portfolio of projects through the real options analysis

2020 ◽  
Vol 25 (3) ◽  
pp. 246-260
Author(s):  
A.B. Lanchakov ◽  
S.A. Filin ◽  
A.Zh. Yakushev
Keyword(s):  
Real Options ◽  
Real Option ◽  
Risk And Uncertainty ◽  
Expected Effect ◽  
The Real ◽  
Investment Projects ◽  
Financial Options ◽  
Portfolio Efficiency ◽  
The Face ◽  
Effective Development

Subject. The article analyzes the expected effect of a portfolio of projects in the face of risk and uncertainty, when using real options. Objectives. The purpose is to offer a more objective formula to assess the expected impact of a portfolio of projects for real investment objects under risk and uncertainty, using real options, and provide recommendations for improving the portfolio efficiency. Methods. The study draws on methods of real options and evaluation of investment projects through the real option value, the cash flow discounting method, synthesis, and mathematical modeling. Results. We systematized the main types of real options and developed a formula for calculating the expected effect of project portfolio implementation. The said formula shows that considering the additional long-term costs embedded in a portfolio of real options, which are associated with the use of these real options, and, therefore, reducing the overall risk of projects and the entire portfolio, permit to improve the objectivity of such calculations. Conclusions. When analyzing real options that have real assets as underlying instruments, it is often impossible to apply the computational formulae for financial options, as they differ significantly. The systematization of the main types of real options helps expand the range of application of management solutions. The offered formula enables to improve the efficiency of project insurance under risk and uncertainty and to use additional opportunities for effective development of the company.

scholarly journals The Sunk Cost and the Real Option Pricing Model

Complexity ◽  
2021 ◽  
Vol 2021 ◽  
pp. 1-12 ◽  
Author(s):  
Songsong Li ◽  
Yinglong Zhang ◽  
Xuefeng Wang
Keyword(s):  
Option Pricing ◽  
Real Options ◽  
Real Option ◽  
Value Function ◽  
Intrinsic Value ◽  
Pricing Model ◽  
Sunk Cost ◽  
Financial Options ◽  
Real Option Pricing ◽  
Option Pricing Model

Although the academic literature on real options has grown enormously over the past three decades, hitherto an accurate real option pricing model has not been developed for investment decision analyses. In this paper, we propose a real option pricing model based on sunk cost characteristics, which can estimate the value of real options more accurately. First, we explore the distinctive features that distinguish real options from financial options. The study shows that the distinguishing feature of the real options is the sunk cost, which does not exist in the financial options. Based on the sunk cost characteristic of real options, we find that the exercise conditions of real and financial options are different. Second, we introduce the sunk cost into the intrinsic value function of real options and establish a new real option pricing model. Finally, this paper also discusses the properties of the intrinsic value function and pricing model of real options. We find that the application of the Black–Scholes option pricing model will overestimate the value of real options.

Valuing Research Investment Projects Based on Discrete Time Model: A Real Options Approach

2014 ◽  
Vol 926-930 ◽  
pp. 4073-4076 ◽  
Author(s):  
Yong Gang Xue ◽  
Ming Li Zhang
Keyword(s):  
Real Options ◽  
Real Option ◽  
Investment Decision ◽  
Substantial Effect ◽  
Time Model ◽  
The Real ◽  
Investment Projects ◽  
Real Option Theory ◽  
Real Option Approach ◽  
Option Theory

The methodology is proposed to value a project based on real options model firstly. Then the BOPM is used to value a project and the empirical results are compared with the results which are based on NPV approach. The results favor the application of the real option theory and show that the option value have important role on investment decision. The results show that the real option approach is more rational than the traditional NPV approach in valuing project because the uncertainty is considered in real option approach. The uncertainty with respect to project return has a substantial effect on investment decision, which is only explained by the option theory.

scholarly journals The Method of Real Options in the Evaluation of Strategic and Investment Decisions

2017 ◽  
Vol 5 (3) ◽  
pp. 41-45
Author(s):  
Гераськина ◽  
A. Geraskina
Keyword(s):  
Real Options ◽  
Real Option ◽  
Net Present Value ◽  
Option Price ◽  
Investment Decisions ◽  
Present Value ◽  
Discounted Cash Flow ◽  
Investment Projects ◽  
Important Addition ◽  
Discounted Cash Flow Method

The method of real options is one of the new approaches to estimate investment projects’ cost and it is an important addition to discounted cash flow method. Real option significantly increases the efficiency of the project due to the possibility of decision-making during its implementation. This aspect is especially important in unstable environmental conditions. The main differences between the financial and real options are presented. The differences of valuation of investment projects by the real options method and net present value are examined. The article presents the types of real options, as well as the methods of calculating the option price.

Real Options Models for Maintenance Decision Making for Offshore Jacket Platforms

2005 ◽  
Author(s):  
Sandra Santa-Cruz ◽  
Ernesto Heredia-Zavoni
Keyword(s):  
Decision Making ◽  
Real Options ◽  
Structural Reliability ◽  
Net Present Value ◽  
Investment Project ◽  
Cash Flows ◽  
Point Of View ◽  
Investment Projects ◽  
Financial Variables ◽  
Financial Options

Real options models are currently available as one of the best tools for the assessment of investment projects. This is so mainly due to the capability of the real options models to: (1) account for uncertainties in financial variables that are crucial to the investment project; and (2) quantify the value of the possibility to make a decision on whether to defer, abandon, expand or reduce the project at one or several points along time. Recently, some researchers have proposed the use of real options models for the assessment of infrastructure projects for hydrocarbon exploitation from an economics point of view. The objective of this work is to develop real options models for decision making regarding inspection, maintenance and decommissioning of offshore facilities taking into account the financial and technical aspects of the project. In all cases it is considered that at some point in the future, within the service lifetime of the structure, the decision maker will have an option to carry or not an inspection, and take or not a maintenance or decommissioning action, which will determine the structural and financial performance of the project for its remaining lifetime. The in-service times with no structural failure and the rehabilitation times are modeled as random variables. The cash flows are modeled as stochastic processes considering interruption of operation due to repairs after failure. Analytical expressions are derived for the computation of structural reliability and availability depending upon maintenance actions. An example is given for a jacket platform subjected to fatigue deterioration and damage. Simple and compound options of maintenance and decommissioning options are analyzed. The value of the project is computed by means of an approach similar to that of Black and Scholes for financial options [2]. The results are compared to those obtained under the traditional Net Present Value approach.

scholarly journals Estimation of economic efficiency of mineral resource base development projects using the real options method

2018 ◽  
Vol 11 (3) ◽  
pp. 280-286
Author(s):  
E. A. Pozdnyakova
Keyword(s):  
Mineral Resource ◽  
Real Options ◽  
Economic Efficiency ◽  
Real Option ◽  
Raw Materials ◽  
Mineral Resources ◽  
Development Project ◽  
Resource Base ◽  
Field Development ◽  
Investment Projects

The article has indicated by the problem of assessing the effectiveness of investment projects of development of mineral resource base in the face of declining quality of raw materials and the transition to the working out of deposits with low content of useful components. The problem of providing with raw materials is relevant for the ferrous metallurgy of theRepublicof Uzbekistan. The decision can be the development of a deposit of titanium-magnetite ores «Tebinbulak» with low iron content. Justification of the effectiveness of such a project requires the use of modern tools. The article has substantiated the possibility of using real options to assess the economic efficiency of investment projects to develop the mineral resource base. In this paper we have considered the concept of real options in relation to the field of investment projects to develop the mineral resource base, have developed a classification of possible options in this area. To assess the value of real option of the project of develop the mineral resources base we have proposed to use Black– Scholes model, have given the interpretation of elements of model in relation to this sphere. On an example of field development project titanomagnetite ores «Tebinbulak» has evaluated the strategic value of the project with realigning option expectations.

Real options in business valuation and investment

2018 ◽  
Author(s):  
Андрей Гусев ◽  
Andrey Gusev
Keyword(s):  
Graduate Students ◽  
Real Options ◽  
Scientific Publication ◽  
Investment Analysis ◽  
Investment Activity ◽  
Business Valuation ◽  
Investment Projects ◽  
University Teachers ◽  
Specific Calculations

In the presented monograph discusses the major problems associated with the development of methods of investment analysis and application of real options method in the assessment of efficiency of investment projects and valuation of enterprise (business). Disclosed the content of the basic models of evaluation of real options, a classification of real options, the theoretical principles supported by specific calculations. Scientific publication intended for graduate students, University teachers, scientific employees, specializing in the field of management of investment activity of enterprises and business valuation.

A real options perspective on entrepreneurial entry in the face of uncertainty

2003 ◽  
Vol 24 (8) ◽  
pp. 515-533 ◽  
Author(s):  
Jonathan P. O'Brien ◽  
Timothy B. Folta ◽  
Douglas R. Johnson
Keyword(s):  
Real Options ◽  
Entrepreneurial Entry ◽  
The Face

scholarly journals Generalization and search in risky environments

2017 ◽  
Author(s):  
Eric Schulz ◽  
Charley M. Wu ◽  
Quentin J. M. Huys ◽  
Andreas Krause ◽  
Maarten Speekenbrink
Keyword(s):  
Cross Validation ◽  
Learning Algorithm ◽  
Search Space ◽  
Risk And Uncertainty ◽  
Exploration And Exploitation ◽  
Function Learning ◽  
Spatially Correlated ◽  
Sampling Behavior ◽  
The Face ◽  
Optimization Routine

AbstractHow do people pursue rewards in risky environments, where some outcomes should be avoided at all costs? We investigate how participant search for spatially correlated rewards in scenarios where one must avoid sampling rewards below a given threshold. This requires not only the balancing of exploration and exploitation, but also reasoning about how to avoid potentially risky areas of the search space. Within risky versions of the spatially correlated multi-armed bandit task, we show that participants’ behavior is aligned well with a Gaussian process function learning algorithm, which chooses points based on a safe optimization routine. Moreover, using leave-one-block-out cross-validation, we find that participants adapt their sampling behavior to the riskiness of the task, although the underlying function learning mechanism remains relatively unchanged. These results show that participants can adapt their search behavior to the adversity of the environment and enrich our understanding of adaptive behavior in the face of risk and uncertainty.

scholarly journals Multilevel approach for Real Options in the innovation management process: integrating project, portfolio and strategy

2017 ◽  
Author(s):  
Vinicius Chagas Brasil ◽  
◽  
Leonardo Augusto Vasconcelos Gomes ◽  
Mario Sergio Salerno ◽  
Rafael Augusto Seixas Reis de Paula ◽  
...  
Keyword(s):  
Real Options ◽  
Innovation Management ◽  
Management Process ◽  
Project Portfolio ◽  
Multilevel Approach
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