Model risk in real option valuation

We introduce a general decision-tree framework to value an option to invest/divest in a project, focusing on the model risk inherent in the assumptions made by standard real option valuation methods. We examine how real option values depend on the dynamics of project value and investment costs, the frequency of exercise opportunities, the size of the project relative to initial wealth, the investor’s risk tolerance (and how it changes with wealth) and several other choices about model structure. For instance, contrary to stylised facts from previous literature, real option values can actually decrease with the volatility of the underlying project value and increase with investment costs. And large projects can be more or less attractive than small projects (ceteris paribus) depending on the risk tolerance of the investor, how this changes with wealth, and the structure of costs to invest in the project

Reform der Grundsteuer als Instrument der Flächenhaushaltspolitik

Die Nutzung der Ressource Grund und Boden weist immer noch erhebliche Effizienzmängel auf. Mit Hilfe welcher Instrumente kann der Flächenverbrauch begrenzt werden? Wie kann eine Reform der Grundsteuer die richtigen Anreize setzen? --

Real Option Approach to Ship Investment Valuation

본 논문은 위험 자산으로 분류되는 선박에 대한 투자가치 평가시 새로운 대안을 제시하는 데에 목적을 둔다. 불확실성이 증가할수록 가치가 낮아지는 기존의 가치평가법을 대체, 실물옵션가격결정법을 제시하여 기존의 방법이 간과하고 있는 유연성의 가치를 발견 및 측정하여 좀 더 정확한 가치를 평가하기 위함이다. 선박은 전통적으로 위험 자산으로 분류된다. 시장위험, 정치적 위험, 자연적 위험 등 수많은 위험에 노출되기 때문이다. 특히 해운경기는 공급의 비탄력성으로 인해서 경기변동폭이 크기 때문에 시장위험은 선박의 투자가치에 매우 부정적인 영향을 미친다. 현재까지 투자가치평가에 가장 널리 쓰이는 방법은 현금흐름 할인법으로 순현재가치법과 내부수익률법이 대표적이다. 이러한 기존의 방법은 불확실성이 높아질수록 투자에 대한 요구수익률이 높아지므로 투자안의 현재가치를 감소시키는 상황이 발생한다. 또한 투자안의 가치가 평가 당시에 정한 요소, 예를 들어 할인율, 현금유입, 현금유출 등에 의해 결정되기 때문에 추후 상황에 따라 전략을 변경하는 경영상의 유연성을 제대로 반영하기 어렵다. 본 연구에서는 이러한 현금흐름할인법을 대체하기 위하여 새로운 투자평가기법인 실물옵션가격결정법을 이용하고자 한다. 실물옵션 가격결정법이란 금융 파생상품인 옵션의 가격결정모형을 이용하여 투자안에 내재된 유연성을 파악하고 그 가치를 평가하는 방법이다. 가치평가 대상의 특성을 고려해 볼 때, 선대투자는 포기옵션, 축소옵션, 확장옵션 등 여러 종류의 실물옵션을 내재하고 있다.This paper investigates a new valuation method of shipping investment. From the view of traditional valuation methods, uncertainty increases risk of investment and discounts the value of it. However, in the Real Option Analysis(ROA), the new method in this article, uncertainty means some additional value of flexibility so that the model can produce a more exact judgement. A ship, as an investment, has been regarded as a very risky asset. Before financing it, investors have to consider several risks such as market, political, and timing. Among the risks, market risk has a very negative effect, because supply inelasticity makes the economic cycle of the freight market more volatile. The most frequently used valuation technique, up to now, is the Discounted Cash Flow(DCF), such as the Net Present Value(NPV) or the Internal Rate of Return(IRR). However, the DCF has some shortcomings. For instance, it depreciates the investment as uncertainty increases, and cannot reflect the value of managerial flexibility as market conditions change. In this paper, the ROA is presented as an alternative to the DCF. Based on the pricing model of option, a financial derivative, ROA analyzes and evaluates the flexibility inherent in the investment. Reviewing the characteristics of it, fleet investment can be seen having several rights: a right to abandon, a right to contract, and a right expand the investment before maturity. In order to assess the value of option, we use the Binomial Option Pricing Model by Cox, Ross, and Rubinstein in 1979. In addition, by applying them to evaluating the same investment, both methods, the DCF and the ROA are compared.Abstract Chapter 1. Introduction 1. Objective and Background 2. Methodology and Sturucture Chapter 2. Theoretical Background 1. Existing Valuation Methods 1) Net Present Value 2) Internal Rate of Return 3) Payback Period 2. Option Pricing Model 1) Black-Scholes Model 2) Binomial Option Pricing Model Chapter 3 Real Option Application to Investment under Uncertainty 1. Limits of the existing methods 2. Introduction of real option 1) General Concepts 2) Taxonomy of Real Options 3. Analysis of Precedent Studies Chapter 4. Empirical Study 1. Shipping Investment Overview 1) Deal Specification 2) Financing Conditions 3) Invest and Payback Plan 2. Investment Valuation by NPV 1) Cash Inflows 2) Cash Outflows (1) Cargo Handling Variable Costs (3) Operation Fixed Costs (4) Administration (5) Taxes (6) Capital Costs (7) Other Costs 3) Weighted Average Cost of Capital 4) Summary 3. Investment Valuation by Real Option Analysis 1) Four-Step Process for Valuing Real Options 2) Types of Option Calculator 3) Real Option Analysis of the Fleet Investment (1) Parameters (2) Marketed Asset Disclaimer (3) Structuring the Binomial Tree (4) Option to Abandon (5) Option to Shrink (6) Option to Expand (7) Combination Option Chapter 5. Conclusion 1. Summary and Implications of Study 2. Recommendations for Future Studies Reference

Investitionsbereitschaft und zeitliche Indifferenz bei Realinvestitionen unter Unsicherheit und Steuern

We analyze the impact of taxation on the option to defer an investment decision and derive tax rates that do not influence the extent of postponement. Furthermore, we deduce from this option pricing framework a measure of an investor's disposition towards realizing an investment project under risk aversion. We show that capital gains taxation often reduces this disposition, whereas asymmetric tax treatment of profits and losses may compensate this effect at least partially. On this basis, we identify indifferent curves that describe different tax schedules providing constant disposition to invest. These curves enable a comparison of different tax rules and their impact on investment decisions without explicitly referring to the after-tax value of an investment project. Thereby, the decisionmaking process is simplified. Applying individual utility functions we finally analyze the influence of taxation on the investor's – decision and on utility-based decisions. We highlight the overwhelming importance of integrating taxes in typically applied valuation approaches. --asymmetric taxation , capital gains tax , investment decisions , risk aversion , uncertainty

Providing efficient network access to green power generators: A long-term property rights perspective. Bruegel Working Paper Issue 7, November 2016

Coordinating the timing and location of new production facilities is one of the challenges of liberalized power sectors. It is complicated by the presence of transmission bottlenecks, oligopolistic competition, and the unknown prospects of low-carbon technologies. We build a model encompassing a late and early investment stage, a clean (green) and dirty (brown) technologies, and a single transmission bottleneck and compare dynamic efficiency of several market designs. Allocating network access on a short-term competitive basis distorts investment decisions as brown firms will pre-empt green competitors by investing early. Compensating early investors for future network congestion, as for instance in the E.U., only exacerbates this problem. Dynamic efficiency is restored with long-term transmission rights that can be traded on a secondary market (iusvendendi). As early investment lowers the resale value of the transmission rights, brown firms will invest optimally. We show that dynamic efficiency does not require the existence of physical rights for accessing the transmission line (ius utendi), but financial rights on receiving the scarcity revenues generated by the transmission line (ius fructendi) suffice

Analyse der Auswirkungen des demografischen Wandels auf die Siedlungsentwässerung mit Hilfe des Realoptionsansatzes

Die vorliegende Ausgabe konzentriert sich auf die Auswahl einer sinnvollen Analysemethode auf Basis des Realoptionsansatzes zur Analyse der Auswirkungen des demografischen Wandels auf die Siedlungsentwässerung. In der Literatur finden unterschiedliche Bewertungstechniken und verschiedene Bewertungsansätze der Realoptionstheorie Anwendung. Die in dieser Arbeit entwickelte Analysemethode kombiniert den qualitativen und den quantitativen Bewertungsansatz miteinander und plädiert für die Bewertungstechnik des Binomialmodells. Es wird eine Methode in fünf Arbeitsschritten vorgestellt, in der Kriterienüberprüfungen hinsichtlich des Vorhandenseins von Unsicherheit und Flexibilität vorgesehen sind. Zur empirischen Anwendung der Analysemethode bietet sich als Untersuchungsgebiet die Abwasserinfrastruktur des Plattenbaugebietes Weißwasser-Süd an, da dort vielfältige Probleme infolge des demografischen Wandels auftreten. Die Analyse zeigt, dass die Kriterien zur Anwendung der entwickelten Methode, Unsicherheit und Flexibilität, hinsichtlich mehrerer Einflussfaktoren und Anpassungsmaßnahmen erfüllt sind und somit die Anwendung des Realoptionsansatzes gerechtfertigt ist. Die Anwendung der Analysemethode auf das Untersuchungsgebiet in Weißwasser offenbart für das Versorgungsunternehmen vielfältige Handlungsmöglichkeiten zum Umgang mit bestehenden Problemen und zur Anpassung an beeinflussende unsichere Faktoren. Weiterhin können mit Hilfe der Analyse die Vor- und Nachteile der ausgewählten Methode aufgezeigt werden, was für weitere Untersuchungen des Themengebietes hilfreich sein kann