![]() ![]() ![]() ![]() The example case is then extended by using the mean reverting stochastic process for the project value and cash flows using the censored binomial presented by Hahn (2005) and the non-censored binomial presented by Bastian-Pinto, Brandão, and Hahn (2010).įinally, the case is valued with a simple, European option equivalent, Monte Carlo approach with the underlying factors following geometric Brownian Motion and mean reverting models, and the results are compared. When the NPV value should be captured by the possibility of future growth options. A comprehensive analysis is conducted to identify the value drivers of options, including timing-aspects, intrinsic option value versus the value of flexibility, sensitivities of the binomial model to interest rate and volatility, and revision of volatility estimates for the BDH case. The term ‘real option’ was coined by Stewart Myers ( 1977: 150), who argued that firms can be seen as a combination of two types of assets, real assets and real options, which Myers ( 1977: 150) defined as ‘opportunities to purchase real assets on possibly favorable terms’. Martha Amram and Nalin Kulatilaka 271 provided five different scenarios when real option theory can be applied: When a project needs updates and mid-course strategy corrections. We can translate the financing question into an option framework and use financial options theory to value the options properly, in the next chapter one will. The binomial real options valuation approach using the market asset disclaimer assumption with an emphasis on state-dependent cash flows is reviewed and implemented using geometric Brownian Motion as the stochastic process for project uncertainty and the cash flows. Simulations and real options are not so much competing approaches for risk assessment, as they are complementary. Here in this article we will briefly discuss about two valuation approaches i.e Discounted Cash Flow (DCF) Valuation Approach and Real Option Valuation Approach. ![]()
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