Risk Management in Investment Decisions. Real Options Approach

Thèse de Master , 2012 , 71 Pages , Note: Merit

Gestion d'entreprise - Investissement et Financement

Numerous managers associate uncertainty with a bad outcome which should be averted. This thesis’ aim is to provide the opposite view. This dissertation will reveal the strategic potential hidden in each investment. If one firm is on the right track, it could obtain profit from the uncertainty. Uncertainty could generate value and capture a market share. Real option approach will present the way how this key aspect could be evaluated.

The roots of the real option approach are derived from the emblematic formula for the finance world of Fischer Black, Robert Merton and Myron Scholes. The revolutionary in their work is that complex contracts could be evaluated. The option-pricing theory take unalterable place not only in financial but also in the real investments. In addition to this, the real option approach becomes a very powerful tool for managing the real assets. This approach could be used in a wide spectrum of managing action. For all the managers who associate uncertainty and risk with a bad aftermath, the real option approach offers a solution for their worries and could advise them with an appropriate way to operate an investment (Amram, 1999, p. vii).

In this work would be made practical as well as theoretical overarching from financial to real options. Chapter 6 is very constructive and useful for future research purposes, because it is suitable contribution to risk management analysis, and it uses a combination of volatility with option pricing, which can calculate more precisely the project risk.

Inhaltsverzeichnis (Table of Contents)

• 1. Introduction
• 1.1. Introductory example
• 1.2. Statement of the problem
• 2. Research Methods
• 3. Frame of Reference and Literature Study
• 3.1. Traditional investment appraisal
• 3.1.1. Static methods
• 3.1.2. Dynamic methods
• 3.2. Options
• 3.2.1. Introductions
• 3.2.2. Fundamentals and Options' concept
• 3.3. Real Options
• 3.3.1. Decision-Tree Analysis
• 3.3.2. Contingent-Claims-Analysis (CCA)
• 3.4. Option Pricing Models
• 3.4.1. The Black-Sholes Model
• 3.4.2. The Binomial Model
• 3.5. Monte Carlo Simulation
• 4. Finding
• 4.1. DTA
• 4.2. CCA
• 4.3. Option Pricing Model
• 5. Analysis
• 6. Case Study
• 6.1. The Real Property Project
• 6.1.1. Planning of Project Cost
• 6.1.2. Planning of Project Revenue
• 6.2. The Project Valuation
• 6.2.1. Valuation with the Net Present Value Approach
• 7. Conclusion
• 8. Recommendation

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This dissertation aims to challenge the traditional view of uncertainty in investment decisions, demonstrating the strategic potential it holds for generating profit and market share. It explores the real options approach, a framework derived from financial option pricing theory, as a powerful tool for managing real assets and evaluating the value of uncertainty.

• The strategic value of uncertainty in investment decisions
• The application of real options theory to real asset management
• The use of decision-tree analysis, contingent claims analysis, and option pricing models to evaluate real options
• The potential of the real options approach to enhance risk management analysis
• Practical application of the real options approach through a case study

Zusammenfassung der Kapitel (Chapter Summaries)

The dissertation begins with an introduction that presents the problem of uncertainty in investment decisions and outlines the real options approach as a solution. Chapter 2 discusses the research methods employed in the study. Chapter 3 provides a comprehensive review of the literature, covering traditional investment appraisal methods, option theory, and the development of the real options approach. Chapter 4 presents the findings of the research, including the application of decision-tree analysis, contingent claims analysis, and option pricing models. Chapter 5 analyzes the findings and discusses their implications for managing real assets. Chapter 6 presents a case study of a real property project, demonstrating the practical application of the real options approach. Finally, Chapter 7 concludes the dissertation by summarizing the key findings and outlining recommendations for further research.

Schlüsselwörter (Keywords)

The key concepts explored in this dissertation include real options, investment decisions, uncertainty, risk management, decision-tree analysis, contingent claims analysis, option pricing models, and real asset valuation. The work highlights the potential of the real options approach to enhance risk management analysis and provide a more comprehensive understanding of the value of uncertainty in investment decisions.

• Université: University of Portsmouth (Business School)
• Cours: Masterarbeit - Risk Management
• Note: Merit
• Auteur: Asen Kolaksazov (Auteur)
• Année de publication: 2012
• Pages: 71
• N° de catalogue: V299087
• ISBN (ebook): 9783656957454
• ISBN (Livre): 9783656957461
• Langue: anglais
• mots-clé: Risk Management, uncertainty, Real Option, option-pricing theory, Investment, real assets, NPV, DCF, investment calculations, CAPM, Options, flexibility, risk-adjusted, R&D, Decision-Tree Analysis, Contingent-Claims-Analysis, binomial lattice, random walk, replicating portfolio, arbitrage, Black-Sholes Model, Binomial Model, Monte Carlo Simulation, twin security trading, @Risk, Case Study, Planning of Project Cost, Planning of Project Revenue, Project Valuation, WACC