[Forside] [Hovedområder] [Perioder] [Udannelser] [Alle kurser på en side]
Learning objectives
The student should be able to:
• Identify all the relevant real options in specific investment scenarios
• Explain the different approaches and underlying assumptions used to evaluate real options
• Value a real option through both analytical and numerical methods
• Reflect on the viability of the different methods in relation to different real option problems
• Contrast how portfolios of financial options and portfolios of real options are valued
• Relate the different forms of uncertainty that can affect an investment, and explain how they affect the valuation
• Solve a case problem involving real options
Course description
The course gives the students the competence to apply real option theory in valuation and strategic decision making through the use of classical real option models and recent advances in the field. The course will analyze both how real option problems can be solved analytically and through numerical techniques. More complex real option problems when taking account of several real options and input uncertainty will also be analyzed.
The course is article-based, supplemented with textbook readings. Real option problems will be analyzed through two assignments. One non-mandatory assignment will be examined during the semester, while another assignment will set the foundation for the examination.
Course subject areas
1. Introduction
2. Toolbox
2.1. Stochastic processes
2.2. Transformation to risk neutral probabilities
2.3. Methods of analysis: 1) Contingent Claims and 2) Dynamic Programming
3. The option to wait & the finite difference method
4. The option to abandon & staged investments
5. The option to scale
6. Numerical methods
6.1. Binomial method
6.2. Monte Carlo method
7. Monte Carlo methods for American type options
8. Portfolios of real options
9. Types of uncertainty, learning, and its effect on real options
The following courses or similar courses are required:
4388: Derivatives and Risk Management
Martin Schultz-Nielsen
Mostly self-study supported by lectures, tutorials and a case.
The lectures will be held in the first half of the semester. In the second half of the semester, students can write a 5 ECTS Topic in the field of real options.
Boyle, Phelim P., 1977, "Options: A Monte Carlo Approach", Journal of Financial Economics, Vol. 4, pp. 323-338 (ARTICLE)
Brach, Marion A., 2003, "Real Options i practice", Chapter 4 & 6, John Wiley and Sons (BOOK)
Brennan, Michael J. & Schwartz, Eduardo S., 1985, "Evaluating Natural Resource Investment", The Journal of Business, Vol. 58, No. 2, pp. 135-157 (ARTICLE)
Cox, John C.; Ross, Stephen A. & Rubinstein, Mark, 1979, "Option Pricing: A Simplified Approach", Journal of Financial Economics, Vol. 7, pp. 229-263 (ARTICLE)
Dixit, Avinash K. & Pindyck, Robert S., 1994, "Investment Under Uncertainty", Chapter 4, Princeton University Press (BOOK)
Huchzermeier, Arnd & Loch, Christoph H., 1999, "Evaluating R&D Projects as Learning Options: Why More Variability is Not Always Better", Technical report, Otto-Beisheim Graduate School of Management, WHU Koblenz, Germany, and INSEAD, Fontainebleau, France (ARTICLE)
Hull, John, 2008, "Options, Futures and Other Derivatives", pp. 435-446, pp. 746-751 & Chapter 27, 7th Edition, Prentice Hall (BOOK)
Longstaff, Francis A. & Schwartz, Eduardo S., 2001, "Valuing American Options by Simulation: A Simple Least-Squares Approach", The Review of Financial Studies, Vol. 14, No. 1, pp. 113-147 (ARTICLE)
Majd, Saman & Pindyck, Robert, S., 1987, "Time To Build, Option Value, and Investment Decisions", Journal of Financial Economics, pp. 7-27 (ARTICLE)
McDonald, Robert & Siegel, Daniel, 1986, "The Value of Waiting to Invest", The Quarterly Journal of Economics, Vol. 101, No. 4, p. 707-728 (ARTICLE)
Myers, Stewart C. and Majd, Saman, 1990, "Abandonment Value and Project Life" in Schwartz, Eduardo and Trigeorgis, Lenos, 2004, "Real Options and Investments under Uncertainty - Classical Readings and Recent Contributions", MIT Press (ARTICLE/BOOK)
Pindyck, Robert S., 1988, "Irreversible Investment, Capacity Choice, and the Value of the Firm", The American Economic Review, Vol. 78, No. 5, pp. 969-985 (ARTICLE)
Trigeorgis, Lenos, 1993, "The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options", The Journal of Financial and Quantitative Analysis, Vol. 28, No. 1, pp. 1-20 (ARTICLE)
Trigeorgis, Lenos, 2004, "Real Options: An Overview" in Schwartz, Eduardo and Trigeorgis, Lenos, 2004, "Real Options and Investments under Uncertainty - Classical Readings and Recent Contributions", MIT Press (ARTICLE/BOOK)
(approx. 400 pages)
7-point grading scale
Take-home exam (with a duration of 1 week) followed by an oral examination (20 minutes)
Examination aids allowed
All (for the take-home exam), none (for the oral exam)
