Real Options in Theory and Practice

Hardcover | July 16, 2009

byGraeme Guthrie

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Decision makers face a staggering array of problems in business and economics. Managers of growing firms have to decide when to exercise growth options and expand their business. Governments have to decide whether to undertake large infrastructure investments. Managers of oil firms must decidehow rapidly to deplete their reserves. Owners of land must decide when and how to develop their asset. Operators of power plants must decide when to start them up and when to shut them down. While these problems seem quite diverse, they share many important features. In each case, the decision makermust choose when to take a particular action that will be difficult, if not impossible, to reverse. In each case, the consequences of taking (or not taking) that action are uncertain. And in each case, the timing and nature of the actions taken by the decision makers directly affect the cash flowsgenerated by the entities they manage. Real options that arise in the real world often vary radically from one problem to another. These differences may arise due to the particular real options embedded in the projects and the order in which they can be exercised. They may arise due to different underlying sources of uncertainty (withpossibilities ranging from easily observable commodity prices to almost unquantifiable factors such as the technological viability of a project. The possibilities are almost endless. This book focuses on building a general approach to solving real options problems from the ground up to show readershow real options can be assembled in a way appropriate to the individual problem being analyzed. The book, part of the Financial Management Association Survey and Synthesis Series, will be a valuable asset to practitioners who want to develop their analytical techniques and also graduate students who will eventually become practitioners. It presents building blocks needed to carry outsuccessful real options analysis and shows how these can be assembled in a way that is appropriate to a wide variety of problems in business and economics. The book contains a CD with spreadsheets that can be to fit the wide variety of real-world problems that readers will confront.

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Decision makers face a staggering array of problems in business and economics. Managers of growing firms have to decide when to exercise growth options and expand their business. Governments have to decide whether to undertake large infrastructure investments. Managers of oil firms must decidehow rapidly to deplete their reserves. Owne...

Graeme Guthrie is a professor in the School of Economics and Finance at Victoria University of Wellington.

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Format:HardcoverDimensions:448 pages, 9.25 × 6.13 × 0.98 inPublished:July 16, 2009Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0195380630

ISBN - 13:9780195380637

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Table of Contents

Preface1. IntroductionPart I: Foundations2. The modeling framework3. Valuing single-period cash flows4. Valuing multi-period cash flows5. Combining valuation and decision makingPart II: Component Real Options6. Options that do not affect the state of a project7. Simple timing options8. Compound timing options9. Uber-compound timing options 20010. Switching options11. Learning optionsPart III: Calibrating the Model12. Calibration using spot and futures price data 29413. Calibration using option price data14. Calibrating trees of alternative state variablesPart IV: Putting the Pieces Together15. Forestry management and valuation16. Developing a gas field17. Mothballing an ethanol plant18. Where to from here?