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The study of investment under uncertainty was stagnant for several decades until developments in real options revitalized the field. The topics covered in this book include the reasons behind the under-investment programme.
Explores real option theory applied in practice Real options are quickly becoming the valuation and decision-making method of choice for many companies, including oil and gas companies, utilities and natural resource companies, pharmaceutical and biotech companies, Internet companies, and many others. Real Options in Practice allows readers to view the world of real options from the vantage point of a corporate practitioner applying real option valuation techniques on a regular basis. Expert Marion Brach describes the challenges of implementing a real option framework in practice within a corporate setting. Touching on the real options most firms care about, Real Options in Practice identifies the classic types of real options-deferral, abandonment, switching, expansion, and compound-and explores the main concepts critical to understanding real option theory. Through Brach's own three-step real option valuation method readers will learn how the theory of real options is now being applied to drive better, more profitable corporate decision-making. Marion A. Brach, MD, MBA (Hagen, Germany), has undertaken financial valuation of business opportunities and acquisitions using scenario and real option valuation in the biotech industry. A recognized expert on real option theory and practice, Brach received her MBA from the Manchester Business School and frequently speaks at real option seminars.
"Real options (ROs) extend the financial option pricing theory to the valuation of real asset investment and managerial flexibility under uncertainty. However, differences between financial and non-financial rnarkets, and the cornplex real world environment of applications, build obstacles for the domain translation from financial options to ROs. This dissertation is motivated by the challenges of domain translation and developed in two essays. The first essay studies the incentive function of ROs (named the RO incentive). The essay develops an option-game framework to model the RO incentive, examines the change of investment behavior caused by the RO incentive, and values the collaboration improvement. A general framework for designing RO incentives is also developed in the essay for different forms of public-private partnerships (PPPs). The second essay focuses on dynamic capacity expansions, a representative RO application, and analyzes important factors of RO practices for the problem. These include economies of scale, capacity expansion mode, opportunity cost of waiting, terminal value of expansions, and capacity cap. Theoretical insights are obtained through the analysis, which are able to efficiently support the dynamic expansion decisions and explain observations from the numerical solution. The work of this dissertation has reduced the gap between the option theory and RO practices. It also has built a scientific foundation for exploring advanced RO problems such as the incentive design for multiple (more than two) agents and dynamic capacity planning with resource constraints during a mission"--Abstract Leaf iii.
Decision-makers in business and economics face a staggering array of problems. For example, managers of growing firms have to decide when to expand their business, governments have to decide whether to undertake large infrastructure investments, and managers of oil firms must decide how rapidly to deplete their reserves. While these problems seem quite diverse, they all share many important features. In each case, the decision-maker must choose when to take a particular action that will be potentially impossible to reverse, and the consequences of taking (or not taking) that action are uncertain. Also, the timing and nature of these actions directly affect the cash flows generated by the entities they manage. This book explains how techniques originally developed to price financial derivatives can be used to analyze real-world decisions, and provides the tools necessary to put them into practice. The real options analysis approach to decision-making is built on strong theoretical foundations, and is widely discussed in practitioner literature, but often only at a fairly intuitive level. What practitioners need-and what this book delivers-is a structured approach to systematically applying real options analysis to the wide variety of problems they will meet in business and economics. Real Options in Theory and Practice focuses on building up a general approach to solving real options problems from the ground up. Rather than aiming to build a "black box" to solve a small set of standardized real options problems, it describes the building blocks of any successful real options analysis and shows how they can be assembled in a way that is appropriate to the problem being analyzed. For both practitioners and academics, Real Options in Theory and Practice will serve as an authoritative and invaluable resource for those looking for effective and practical solutions to complex, real-life problems.
Real options refer to the investment, entry, exit and other strategic decisions of the firm that share three important characteristics: they are irreversible, they are made under uncertainty, and their timing is chosen by the firm. The term `real options' was introduced in 1977 by Stewart Myers in his paper `Determinants of corporate borrowing' that related risky debt holdings to the future investment policy of the firm. The literature on real options has since been active and growing with seminal works by Brennan and Schwartz (1985) on the valuation and optimal timing of the natural resource investments; McDonald and Siegel (1986) on general approach to investment timing and scrapping; Margrabe (1978) on the asset exchange options; Fudenberg and Tirole (1985) on the preemption and equilibrium in the technology adoption games; Pindyck (1988) on capacity choice, and Kulatilaka and Perotti (1998) on strategic growth options under imperfect competition. In the 1990's and 2000's, a number of classical textbooks in real options appeared in print: Dixit and Pindyck (1994), Trigeorgis (1996), Amram and Kulatilaka (1998), and Vollert (2003). In its development the real options literature combines the option pricing framework introduced in Black and Scholes (1973) and Merton (1973) with the research in the specific fields of economics and finance such as capital budgeting and investment policy, corporate debt and agency problems, mergers & acquisitions or game theory. The present work illustrates the application of the real options approach to three economic areas: strategic competition, mergers & acquisitions and international trade. The first chapter discusses the optimal timing of the technology adoption, entry and merger decisions in the industry producing a vertically differentiated product. I solve the model for the monopoly, duopoly and merger (which is equivalent to a monopoly with two products) and outline the equilibrium strategies of the Incumbent and the Entrant.
"Mun demystifies real options analysis and delivers a powerful, pragmatic guide for decision-makers and practitioners alike. Finally, there is a book that equips professionals to easily recognize, value, and seize real options in the world around them." --Jim Schreckengast, Senior VP, R&D Strategy, Gemplus International SA, France Completely revised and updated to meet the challenges of today's dynamic business environment, Real Options Analysis, Second Edition offers you a fresh look at evaluating capital investment strategies by taking the strategic decision-making process into consideration. This comprehensive guide provides both a qualitative and quantitative description of real options; the methods used in solving real options; why and when they are used; and the applicability of these methods in decision making.
Examines the ways in which real options theory can contribute to strategic management. This volume offers conceptual pieces that trace out pathways for the theory to move forward and presents research on the implications of real options for strategic investment, organization, and firm performance.
In the winter of 1933, the American financial and economic system collapsed. Since then economists, policy makers and financial analysts throughout the world have been haunted by the question of whether "It" can happen again. In 2008 "It" very nearly happened again as banks and mortgage lenders in the USA and beyond collapsed. The disaster sent economists, bankers and policy makers back to the ideas of Hyman Minsky – whose celebrated 'Financial Instability Hypothesis' is widely regarded as predicting the crash of 2008 – and led Wall Street and beyond as to dub it as the 'Minsky Moment'. In this book Minsky presents some of his most important economic theories. He defines "It", determines whether or not "It" can happen again, and attempts to understand why, at the time of writing in the early 1980s, "It" had not happened again. He deals with microeconomic theory, the evolution of monetary institutions, and Federal Reserve policy. Minsky argues that any economic theory which separates what economists call the 'real' economy from the financial system is bound to fail. Whilst the processes that cause financial instability are an inescapable part of the capitalist economy, Minsky also argues that financial instability need not lead to a great depression. This Routledge Classics edition includes a new foreword by Jan Toporowski.