Portfolio Approach to Real Options
A portfolio perspective on real options makes it possible to gain insights into the interplay of real options that could not be captured in a stand–alone analysis. It is well established in financial theory that financial assets must be valued from a port
- PDF / 505,115 Bytes
- 13 Pages / 595.276 x 841.89 pts (A4) Page_size
- 52 Downloads / 227 Views
A portfolio perspective on real options makes it possible to gain insights into the interplay of real options that could not be captured in a stand– alone analysis. It is well established in financial theory that financial assets must be valued from a portfolio perspective (cf., e.g., Constantinides 1989). A review of financial portfolio theory is provided in Sec. 3.1. Similarly to financial portfolios, portfolios of real options are affected by numerous aspects, which will be developed in the following. In this chapter, the portfolio perspective will be introduced in detail, and then linked to the ensuing general model that is developed subsequently.
2.1 Motivation of the Portfolio Approach to Real Options The motivation for considering real options jointly in a portfolio context derives from the specifics of real options. This is why this motivation is based on a focused introduction of the general concept of real options, and the definition of the resulting portfolio problem. 2.1.1 Real Options and Financial Options The term “real options” was coined by Myers (1977) who stated that “real options [...] are opportunities to purchase real assets on possibly favorable terms” (Myers 1977, p. 163). A more precise definition is found in Sick (1995, p. 631) who defines a real option as “the flexibility a manager has for making decisions about real assets. These decisions can involve adoption, abandonment, exchange of one asset for another or modification of the operating characteristics of an existing asset”. An introduction to real options can be found in Dixit and Pindyck (1994), Trigeorgis (1996), Amram and Kulatilaka (1999), Copeland and Antikarov (2001), and Smit and Trigeorgis (2004).
8
2 Portfolio Approach to Real Options
Recent comprehensive overviews of the growing body of real options literature are given in Lander and Pinches (1998), Baecker and Hommel (2004), and Trigeorgis (2005). A financial option gives the holder the right but not the obligation to buy or sell a financial asset, e.g., stock traded on financial markets, under specified terms. These terms define the period of time over which the option can be exercised, in exchange of the exercise price. A call option gives the right to acquire the underlying asset, a put option gives the right to sell the underlying assets. An American option can be exercised at any time before and including the expiration date, whereas a European option can only be exercised on the expiration date (cf. Luenberger 1998, pp. 319 ff.). The value of an option stems from the riskiness of the underlying assets. As compared to a long position in the underlying asset, the option provides insurance against losses (cf. McDonald 2003, pp. 44 ff.). It enables to protect from the downside potential of the underlying asset, while benefiting from the upside potential. This asymmetry between upside and downside is visualized in Fig. 2.1. At maturity, if the value of the underlying asset is below the exercise price, the option is not exercised and yields zero payoff. Otherwise, the
Data Loading...
