2006

Abstract:

Over the past decade, the Real Options approach to investment decisions provided a comprehensive framework for valuing flexibility in time and managerial opportunities. Despite its popularity (a recent survey found that about 25% of CEOs in North America "almost always" consider the real options value of a project), the use of real options has been limited by either one or both of the following unrealistic assumptions: (1) that the time horizon is infinite and (2) that markets are complete. In this talk I will present a finite- horizon, discrete--time algorithm for valuing a portfolio of decisions on a project which is only imperfectly correlated to capital markets. The investment decisions are treated as early-exercise options which, due to the incompleteness created by the lack of a perfectly correlated traded asset, are valued by the method of utility indifference. I then analyze how the thresholds for the decision to invest, abandon, suspend or reactivate a project depend on the underlying model parameters. Furthermore, I calculate how these results change in the presence of competition by superposing game theoretical decision--trees to the option pricing trees.

Note: This talk will be followed by Tapio Ala-Nissila's Coarse-grained Model Studies of Polymer Translocation through Nanopores.