Real Options in Investment Decision

Document Sample
Real Options in Investment Decision Powered By Docstoc
					Real Options in Investment Decision
1997 Nobel Prize for Economics awarded to Robert. Merton (Robert.C.Merton) and
Myron. Scholes (Myron.S, seholes), not only because they successfully solved the
option pricing problem, the promotion of financial derivatives The Fa Zhan, more
importantly, the discovery that they promoted the option theory in other economic
areas of Guangfanyingyong, makes some among the most difficult economic field the
uncertainty we obtain the interpretation of Liang Hua and Yi Ding. The most attention,
and gradually the people who implemented the project evaluation and investment
decisions is the real option (realoption) analysis, which overcomes the shortcomings
of NPV in theoretical and empirical challenges can not be resolved, is more and more
of the investment decision-makers recognized and used.
A financial option and real option in the definition of
Financial option (option) is a contractual right to give the holder a period of time in
the future to a certain price to buy or sell a financial asset (stock, futures, interest rate,
etc.) right. According to the execution time of different options can be divided into
European-style options and American options. European-style homes off-site day of
love is the holder the right flowers have a fixed time in the future purchase or sale of
the rights of a financial asset; American option is the holder of a certain period of time
in the future any time to buy or the right to sell a financial asset. Another option under
the holder's rights can be divided into straight call and put options on their
homes birthday flowers, including a call option gives the holder at a future time to a
certain price for the rights of certain financial assets, bearish option holder is given a
certain time in the future to sell certain rights of certain financial assets.
Real option is derived from the financial option for a class of options. Broadly
speaking, real option is the project investment decision-making; narrowly speaking, it
is investment in the future to give policymakers the right to take some kind of
investment decision. In fact, a company to assess a project, with investment
opportunities in the project which is like buying an American option, the option to
give investors a certain period of time in the future by the exercise price (investment
cost) to buy the underlying asset (to obtain the project). Like financial options with
the option of the underlying asset (the project's net present value) fluctuate
with the market. When the market value (net present value of the project) is greater
than the exercise price (investment cost) when it is profitable, so that investors will
choose to implement the option to invest in the project. The option because of
uncertainty about the underlying asset has value. Financial option and real option in
the difference between the parameters can be expressed in the following table:

Although the basic features of view, real options and financial options to send flowers
home network of 10 straight points on similar but not identical. Differences between
them are mainly embodied in the following four aspects: First, non-exclusive.
Financial options have exclusive ownership, and real options in addition to the
franchise, the do not have the exclusive. Second, non-transactional. Trading of options
has two meanings, the underlying asset transactions and trading of options itself. For
the financial option for both the underlying asset or the option is there with a more
efficient trading market, so the transaction costs low, even negligible. Real options is
not, not only the underlying asset - investment projects are almost non-existent market,
real option itself is not a separate transaction. 3, the first account of. As can be shared
or competitive existence, first implementation of real options are available to
pre-emptive effect, not only made a strategic initiative, but also achieves the
maximum value of real options. 4, has relevance. For the financial option, its exercise
price entirely depends on the size of their own characteristics, that is, the
implementation of the underlying asset price and the price difference, independent of
other factors that it is independent. This independence is not real options exist. In
most cases, enterprises have existed between the various real options has relevance,
that is a real option exercise price depends not only on its own characteristics, but also
with other yet-to-value of the real option.
Second, financial options and the kind of love right on the pricing of their homes to
send flowers online
As the uncertainty of the underlying asset makes the options have some value,
financial options pricing theory after decades of research have developed a more
comprehensive pricing system. Two more for today's financial option
pricing models are the Cox, Ross and Rubinstein, who proposed the binomial pricing
model and the Black, Scholes option pricing model proposed by continuous, they are
based on the principle of risk-neutral and arbitrage-free basis. According to this
principle, by constructing the underlying securities and portfolio risk-free bonds, copy
the appropriate options in the income characteristics of the cost to construct the
portfolio is the current price options. Since real options and financial options in
exclusive, the difference between trading and other aspects of real options in pricing
makes difficult.
Fortunately, 5.P.Mason and RCMerton that certain assumptions, it can be deduced
using the method of financial option pricing model to establish the real option pricing
model. Real option pricing, the key is to find a market in the capital and for evaluation
Shijizichan or Xiangmujuyou same Fengxian characteristics of marketable securities
Chen Zhiwei, "twin security", and also the love of tradable
securities on the Youguan information to send flowers Jia Yuan instead of physical
assets and the volatility of prices and other information, and use of financial option
pricing methods to the real option pricing. Real option at this stage of quantitative
analysis methods are: (1) PDE (Partialdifferentialequa-tion) method - analytical
solution (Blaek-Se-holes option pricing model), analytical approximate solution,
numerical solution (finite difference method); (2) Dynamic Programming - binary tree
model; (3) simulation - Monte Carlo simulation.
Third, the specific case
To illustrate the process of real option pricing and investment decisions in the role of
specific examples we see the following:
An investment amount of 11 million yuan, a year after the cash flow generated by the
project, there are two possibilities: Market bullish 18 million yuan; slump 6 million
yuan, has remained the same since. From the current forecast its cash flow for the 10
million yuan, the project's life for one year. Market to improve, to the
possibility of the bad 50%, risk-free interest rate of 8%, CAMP's 风险报
酬 率 estimated 20%. Suppose investors can invest in can immediately decide
whether to invest a year later.
(1) the traditional NPV method, NPv = (0.5 * 1800 +600 * 0.5) / (1 +0.2) -1100 =-
100 since NPV <0, should reject the project.
(2) use option theory, the use of two pricing models can be obtained its value.
Because it would be the equivalent of a call option, when cash flows increase and
more than 11 million yuan when the exercise price will be implemented, or else give
up. In order to determine the value of real options and the first to find a real option
has the same risk characteristics of the "twin security." Suppose
we find in the stock market on a stock S. The stock's current market price
of 20 dollars per share, one year after the price is expected to be up or down to 36
dollars to 12 dollars, that is u = 1.8, d = 0.6, and the probability of occurrence of these
two cases are 0.5 . Clearly, the stock's risk characteristics and risk
characteristics of investment projects are identical, consistent with doing
"twin security" conditions.
Find a "twin security", we can follow the binomial pricing of
financial options to export the idea of binomial option pricing formula in kind. First of
all securities with a twin and a combination of risk-free bonds to replicate real option,
that is, do the following portfolios: the S N share price buy twin share, with the home
straight on the phone to send flowers to borrow the amount of risk-free bond B the
portfolio value of NS-B. A year later the corresponding value of the portfolio, there
are two possibilities: First, with probability q into NS-(1 + r) B; one with probability
1-q into the NS-(1 + r) B. If the requirements of real options in the value of one year
with the same value of the portfolio, namely:
E + = NS + - (1 + r) B
E = NS-(l + r) B
By the above equation can be solved:
N = (E +-E-) / (S + - S-)
B = (NS, E-) / (1 + r)
Therefore, under the assumption of no arbitrage opportunities, the current value of
real options should be equal to the value of the portfolio:
E = NS-B = [pE + + (1-p) E-"/ (l + r)
Of which:
P = [(1 + r) S-S-] / (S +-S-)
So long as we are given the possibility of real option value in the end, you can use on
the expiration of the current value of type E. This example, the 0 in decision-making,
cash flow, less than 11 million yuan to 10 million yuan and wait for it to give up after
one year if favorable, while cash flow is 18 million yuan investment, income, E + =
1800-1100 ( 1 +0.08) = 612 million; the bad, the cash flow of 600 million, to abandon
investment in E-= 0. Binomial option pricing model known by the risk-neutral
probability p = [(1 + r) sS-] / (SS-) = [(1 +0.08) 20-12] / (36-12) = 0.4, then the
project The value of C = [p * E + (1-p) E-] / (1 + r) = (0.4 * 612 +0.6 * 2) / 1.08 =
226.7 million, as C> 0 it can not reject the project. Specific practices is the
first non-Touzi, but can not veto the project, but should retain the project's
investment rights or should 以 C = 226.7 million dollars in the right to sell the
investment of the project.
In summary, real options have option features, that is, the irreversibility of investment,
time delay and selective investment in a variety of changes and flexibility, reflects
real-life characteristics of investment projects, while the NPV method violated these
characteristics; real option discount rate used for the risk-free interest rate, objective
standards, but NPV rule or by using the weighted average cost calculated 风险报酬
率 CAMP, while the Japanese love to send flowers home to their homes and to
increase with the uncertainty adjust the level of the discount rate, with considerable
subjectivity; real options are the same as with NLPV method based on the estimated
future cash flow basis, but more to the empirical real options to consider, a better
understanding of the actual investment behavior. Therefore, real options should be
evaluated and a more rational decision-making investment projects and more
scientific methods.