Using Binomial Decision Trees to Solve Real-Option Valuation Problems

Brandão, Luiz Eduardo Teixeira; Dyer, James S.; Hahn, Warren J.

doi:10.1287/deca.1050.0040

Cited by 187 publications

(103 citation statements)

References 13 publications

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“…Such method bases on the assumption that there are two types of risk associated with most real investments: public or market risks, which can be hedged by trading securities and valued using option pricing theory, and private risks, which are project-specific risks and can be valued using decision analysis techniques. However, while the McCardle-Nau-Smith approach has a natural appeal in contexts where the distinction between markets risks and project specific risks is very natural (e.g., oil and gas exploration projects), there are several situations or industries where the distinction between market risks and project-specific risks is not as sharp (Brandão et al, 2005).…”

Section: Evaluating Real Options: Empirical Evidencementioning

confidence: 99%

A Monte Carlo Simulation and Fuzzy Delphi-Based Approach to Valuing Real Options in Engineering Fields

Pellegrino¹,

Costantino²

2012

Risk Management for the Future - Theory and Cases

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Section: Evaluating Real Options: Empirical Evidencementioning

confidence: 99%

A Monte Carlo Simulation and Fuzzy Delphi-Based Approach to Valuing Real Options in Engineering Fields

Pellegrino¹,

Costantino²

2012

Risk Management for the Future - Theory and Cases

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“…Decision analysis calculates the best decision path to take by maximizing the expected value of the outcomes. Decision trees and their variants have been used for real options valuation [45], [55], as an alternative to financial valuation models (see Section III). For example, binomial decision trees have been devised in [55] as a more intuitive alternative to the binomial lattice valuation method.…”

Section: Comparison To Related Workmentioning

confidence: 99%

Real Options in Enterprise Architecture: A Holistic Mapping of Mechanisms and Types for Uncertainty Management

Mikaelian

Nightingale

Rhodes

et al. 2011

IEEE Trans. Eng. Manage.

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Abstract-Uncertainty management is crucial for achieving high performance in enterprises that develop or operate complex engineering systems. This study focuses on flexibility as a means of managing uncertainties and builds upon real options analysis (ROA) that provides a foundation for quantifying the value of flexibility. ROA has found widespread applications ranging from strategic investments to product design. However, these applications are often isolated to specific domains. Furthermore, ROA is focused on valuation, rather than the identification of real options. In this paper, we introduce a framework for holistic consideration of real options in an enterprise context. First, to enable a holistic approach, we use a generalized enterprise architecture framework that considers eight views: strategy, policy, organization, process, product, service, knowledge, and information technology (IT). This expands upon the classical IT-centric view of enterprise architecture. Second, we characterize a real option as a mechanism and type. This characterization disambiguates among mechanisms that enable flexibility and types of flexibility to manage uncertainties. Third, we propose mapping of mechanisms and types to the enterprise architecture views. We leverage this mapping in an integrated real options framework and demonstrate its benefit over the traditional localized approach to ROA.

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“…Brandão et al (2005) concluem que os métodos tradicionais de análise de investimentos como o Fluxo de Caixa Descontado (FCD) são incapazes de captar a volatilidade existente nos projetos agroflorestais e é neste cenário que a Teoria das Opções Reais mostra-se com maior eficiência. Frey et al (2009) afirmam que a modelagem pelas opções reais tornou-se muito importante e utilizada na economia florestal na última década e tem sido utilizada para estimar rotações ideais de colheita e regimes de desbaste pelo fato da colheita da madeira ser uma decisão flexível, podendo aguardar condições futuras ideais.…”

Section: Introductionunclassified

Aplicação Da Teoria Das Opções Reais Na Análise De Investimentos Em Sistemas Agroflorestais

Joaquim

Souza

et al. 2015

CERNE

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RESUMO:Neste trabalho, compararam-se os valores gerados pela análise econômica tradicional (Valor Presente Líquido -VPL) com as Opções Reais. Aplicou-se o método proposto por Copeland & Antikarov para opções arco-íris, devido às três variáveis estocásticas selecionadas, com decisão de abandono caso o valor do projeto com flexibilidade fosse menor que o valor do ativo subjacente. Possibilitando a geração do valor de flexibilidade para que o empreendedor tenha mais confiança na tomada de decisão no momento de investir em um projeto com Sistema Agroflorestal, com a visualização de diversos cenários em uma única análise. Os resultados demonstraram que a análise de viabilidade econômica com Opções Reais propicia a melhor visualização dos possíveis cenários, dentro de um intervalo gerado pela volatilidade dos preços. O VPL adotado como o valor do ativo subjacente foi de R$ 5.684,32, com a taxa de desconto (WACC) de 9,95% e taxa de juros livre de risco de 7,5%. Para determinar a volatilidade calculou-se: o desvio padrão do retorno logaritmizado (27,06), a média (0,0883), valores dos movimentos ascendentes (u) 1,3107 com probabilidade de ocorrência de 61,34% e descendentes (d) 0,7628 com probabilidade de 38,66%. O valor da opção em caso de abandono foi de R$ 2.059,01/ha positivo. Os resultados mostraram que o VPL superestimou o retorno do projeto e que seria viável abandoná-lo. THE THEORY OF REAL OPTIONS IN INVESTMENT ANALYSIS OF AGROFORESTRY SYSTEMSABSTRACT: In this study we compared the values generated by traditional economic analysis (Net Present Value -NPV) with Real Options Method. The objective was to apply the method proposed by Copeland & Antikarov for rainbow options, due to three stochastic variables selected with decision of abandonment if the project value with flexibility was less than the value of the underlying stock. It enabled the flexibility value generation in order to entrepreneurs to have more confidence in their decision when they are investing in a project with Agroforestry System, with different scenarios visualization in a single analysis. The results evidenced that the economic viability analysis, using Real Options, provided the best view of the possible scenarios, within a range generated by the prices volatility. The Net Present Value adopted as the underlying stock value was R$ 5,684.32, using the discount rate (WACC) of 9.95% and risk-free interest rate of 7.5%. To determine the volatility were calculated: the logarithmic return standard deviation (27.06), the average (0.0883), upward movements values (u) (1.3107) with 61.34% of probability and downward movements values (d)(0.7628) with 38.66% of probability. The option value in case of abandonment was R$ 2,059.01/ha positive. The results showed that the NPV overestimated the project return and that it would be viable to abandon it.

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Using Binomial Decision Trees to Solve Real-Option Valuation Problems

Cited by 187 publications

References 13 publications

A Monte Carlo Simulation and Fuzzy Delphi-Based Approach to Valuing Real Options in Engineering Fields

A Monte Carlo Simulation and Fuzzy Delphi-Based Approach to Valuing Real Options in Engineering Fields

Real Options in Enterprise Architecture: A Holistic Mapping of Mechanisms and Types for Uncertainty Management

Aplicação Da Teoria Das Opções Reais Na Análise De Investimentos Em Sistemas Agroflorestais

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