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Article
Publication date: 11 January 2008

Oliver Yu

The concepts of real options analysis, which transfer options analysis for financial investments to those involving real properties, such as land and plant facilities…

Abstract

Purpose

The concepts of real options analysis, which transfer options analysis for financial investments to those involving real properties, such as land and plant facilities, have already existed for 30 years. However, the actual application of real options analysis to technology portfolio planning has not been as widespread as expected. Among others, a major barrier to such applications appears to be a lack of appreciation and acceptance of real options by technology executives. This case study aims to present a successful application experience of real options analysis to technology portfolio planning and highlights the lessons learned in overcoming such lack of acceptance and other barriers.

Design/methodology/approach

The paper uses a case study approach. The methodology focuses on describing the key issues and solutions for applying real options analysis in the technology portfolio‐planning process of a company.

Findings

The findings in this paper showed that considerable barriers exist in the acceptance of real options analysis for technology portfolio planning. However, the experience in the case study provides successful approaches for overcoming these barriers.

Originality/value

The paper shows that few studies are available on the difficulties of introducing real options analysis in practical applications. This paper provides a valuable case study for such applications.

Details

International Journal of Quality & Reliability Management, vol. 25 no. 1
Type: Research Article
ISSN: 0265-671X

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Article
Publication date: 18 November 2013

Graeme Guthrie

This paper aims to demonstrate the practical application of real options analysis to the evaluation of multistage projects, using an example involving a commercial real…

Abstract

Purpose

This paper aims to demonstrate the practical application of real options analysis to the evaluation of multistage projects, using an example involving a commercial real estate development.

Design/methodology/approach

The approach demonstrated builds on static discounted cash flow (DCF) analysis and requires knowledge of only the binomial option pricing model.

Findings

Real options analysis can be implemented in a spreadsheet and only one parameter – the volatility of the price of the completed project – needs to be estimated in addition to those required for static DCF analysis. The approach described can be used to evaluate a project at any stage of development, which is especially useful when the suspension of partly completed projects is under consideration.

Originality/value

The paper shows how to carry out real options analysis of complex multistage development projects using straightforward valuation tools, making an important project evaluation technique more readily available to practitioners.

Details

Pacific Accounting Review, vol. 25 no. 3
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 17 March 2014

Stoyu I. Ivanov

In this study, the author aims to examine the behavior of QQQ options at the time of the QQQ move from AMEX to NASDAQ on December 1, 2004. The author addresses the…

Abstract

Purpose

In this study, the author aims to examine the behavior of QQQ options at the time of the QQQ move from AMEX to NASDAQ on December 1, 2004. The author addresses the questions: is there a relation between hedging and speculation, if such a relation exists considering the improvement in market trading efficiency after the QQQ move did the relation between speculative demand for options and hedging demand for options strengthen at the time of the QQQ move, if such a relation exists does hedging activity follow speculative activity.

Design/methodology/approach

The author uses the fact that deep-out-of-the-money puts are used for hedging, whereas deep-out-of-the-money calls are used for speculation. The author uses spectral analysis on QQQ options in the attempt to answer the research question. The author uses spectral analysis because the data in the study are non-normally distributed which would make parametric testing meaningless.

Findings

The author finds that indeed the relation between speculative demand and hedging demand for options exists and strengthens after the consolidation of trading on NASDAQ and that hedging follows speculation. The fact that this relation exists is economically meaningful in that this is established for the first time empirically in support of the theoretical models predicting this relation's existence.

Originality/value

Market participants on both the speculation side of the investment spectrum, such as hedge funds, and hedging side of the investment spectrum, such as mutual funds and money managers, would be interested in this topic and the findings of this paper. The main contribution of this study is in examining the relation between differential demand for options by using the non-parametric tools of spectral analysis. This helps extend the understanding of exchange traded funds' (ETF') option behavior and contributes to this strand of the ETF literature.

Details

The Journal of Risk Finance, vol. 15 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 22 March 2011

Haider Abbas, Christer Magnusson, Louise Yngstrom and Ahmed Hemani

The purpose of this paper is to address three main problems resulting from uncertainty in information security management: dynamically changing security requirements of an…

Abstract

Purpose

The purpose of this paper is to address three main problems resulting from uncertainty in information security management: dynamically changing security requirements of an organization; externalities caused by a security system; and obsolete evaluation of security concerns.

Design/methodology/approach

In order to address these critical concerns, a framework based on options reasoning borrowed from corporate finance is proposed and adapted to evaluation of security architecture and decision making for handling these issues at organizational level. The adaptation as a methodology is demonstrated by a large case study validating its efficacy.

Findings

The paper shows through three examples that it is possible to have a coherent methodology, building on options theory to deal with uncertainty issues in information security at an organizational level.

Practical implications

To validate the efficacy of the methodology proposed in this paper, it was applied to the Spridnings‐och Hämtningssystem (SHS: dissemination and retrieval system) system. The paper introduces the methodology, presents its application to the SHS system in detail and compares it to the current practice.

Originality/value

This research is relevant to information security management in organizations, particularly issues on changing requirements and evaluation in uncertain circumstances created by progress in technology.

Details

Information Management & Computer Security, vol. 19 no. 1
Type: Research Article
ISSN: 0968-5227

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Article
Publication date: 2 August 2013

Francesco Baldi

Real options available to developers and leading to an active and dynamic development of real estate assets are numerous. The purpose of the article is twofold. First, a…

Abstract

Purpose

Real options available to developers and leading to an active and dynamic development of real estate assets are numerous. The purpose of the article is twofold. First, a conceptual framework is proposed as a practical aid for recognizing and understanding some frequently recurring combinations of options (such as deferral and expansion options). Based on the definition and classification of real options available in real estate markets, a comprehensive valuation tool for quantifying the value of those options embedded in a real estate development project is thus developed using a portfolio view.

Design/methodology/approach

Based on standard option pricing techniques, the proposed conceptual methodology is validated by applying it to an actual case of an investment for the construction of a new, multi‐purpose building in the semi‐central zone of the urban area of Rome (Italy).

Findings

Based on a static land value of €34.7 million, a waiting mode (deferral option) at an early stage of developing a property accounts for 16 percent of the expanded land value of the project, with 8 percent of such value being contributed by the expansion option. A real options valuation of the options portfolio available to a real estate developer enables increasing the project value by 31.1 percent as opposed to a traditional DCF analysis. In line with financial options theory, values of real options increase as volatility rises.

Practical implications

The case‐based analysis highlights that: flexibility in real estate development may create additional value enabling real estate developers or funds to react to market trends as new information arrives and uncertainty on fundamental factors (e.g. property prices) unfolds; the extra value added by managerial flexibility is neglected by DCF/NPV techniques; contrary to the common criticism on its lack of rigor, option valuation theory is suitable for appraising real estate assets; a portfolio approach is crucial when multiple real options exist.

Originality/value

Active management of real estate investments in response to changing property market and technology conditions confers operating flexibility and strategic value to appraisal of development projects beyond what is traditionally captured by a DCF model. An options approach to valuing and managing real estate development may change the developer's perspective altogether. Based on the combination of an original classification and a portfolio view of options existing in real estate markets, a real options framework for assessing the value of strategic flexibility incorporated in a greenfield development project (also accounting for potential option interactions) is designed.

Details

Journal of European Real Estate Research, vol. 6 no. 2
Type: Research Article
ISSN: 1753-9269

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Article
Publication date: 29 July 2014

Jussi Vimpari and Seppo Junnila

The purpose of this study is first to evaluate whether real options analysis (ROA) is suitable for valuing green building certificates, and second to calculate the real…

Abstract

Purpose

The purpose of this study is first to evaluate whether real options analysis (ROA) is suitable for valuing green building certificates, and second to calculate the real option value of a green certificate in a typical office building setting. Green buildings are demonstrated as one of the most profitable climate mitigation actions. However, no consensus exists among industry professionals about how green buildings and specifically green building certificates should be valued.

Design/methodology/approach

The research design of the study involves a theoretical part and an empirical part. In the theoretical part, option characteristics of green building certificates are identified and a contemporary real option valuation method is proposed for application. In the empirical part, the application is demonstrated in an embedded multiple case study design. Two different building cases (with and without green certificate) with eight independent cash flow valuations by eight industry professionals are used as data set for eight valuation case studies and analyses. Additionally, cross-case analysis is executed for strengthening the analysis.

Findings

The paper finds that green certificates have several characteristics similar to real options and supports the idea of using ROA in valuing a green certificate. The paper also explains how option pricing theory and discounted cash flow (DCF) method deal with uncertainty and what shortcomings of DCF could be overcome by ROA. The results show that a mean real option value of 985,000 (or 8.8 per cent premium to the mean property value) was found for a Leadership in Energy and Environmental Design Platinum certificate in the Finnish property market. The main finding of the paper suggests that the contemporary real option valuation methods are appropriate to assess the monetary value and the uncertainty of a green building certificate.

Originality/value

This is the first study to argue that option-pricing theory can be used for valuing green building certificates. The identification of the option characteristics of green building certificates and demonstration of the ROA in an empirical case makes questions whether the current mainstream investment analysis approaches are the most suitable methods for valuing green building certificates.

Details

Journal of European Real Estate Research, vol. 7 no. 2
Type: Research Article
ISSN: 1753-9269

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Article
Publication date: 14 June 2011

Karen A. Shastri, Kuldeep Shastri and David E. Stout

This paper aims to provide upper‐level accounting and/or finance students with a review of the intricacies of option pricing, discounted cash flow (DCF) capital budgeting…

Abstract

Purpose

This paper aims to provide upper‐level accounting and/or finance students with a review of the intricacies of option pricing, discounted cash flow (DCF) capital budgeting decision models, various types of real options, how risk analysis of long‐term capital investments can be facilitated by explicit consideration of real options, and the role of sensitivity analysis in the analysis of capital investment projects with real options.

Design/methodology/approach

The paper describes a fictional company facing a risky capital investment proposal. Students evaluate the investment proposal using traditional DCF analysis (i.e. the net present value method), and then re‐run the analysis by incorporating the existence of real options into the analysis of the proposed investment. Finally, students see the value of using Crystal Ball software for conducting sensitivity analysis as part of the decision‐making process.

Findings

There are two primary conceptual lessons that students realize by completing this educational case: real‐options analysis is a conceptually correct and robust way to explicitly deal with project uncertainty, and failure to explicitly consider real options in the analysis of capital investment projects may result in suboptimal decision making.

Originality/value

This case covers all major real‐option topics required for the certified management accountant exam. Further, the case fills a void in the literature of accounting education as this literature pertains to the availability of case material regarding the use of real options as an extension to conventional capital budgeting techniques.

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Article
Publication date: 1 November 1992

William L. Berry, William J. Tallon and Warren J. Boe

Reports a new method for preparing a product structure analysis toimprove the effectiveness of the master scheduling function for productsthat are manufactured on an…

Abstract

Reports a new method for preparing a product structure analysis to improve the effectiveness of the master scheduling function for products that are manufactured on an assemble‐to‐order basis. This methodology for conducting product structure analysis uses relational database management software to identify common and unique material in a product structure. Highlights example results of the application of methodology.

Details

International Journal of Operations & Production Management, vol. 12 no. 11
Type: Research Article
ISSN: 0144-3577

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Article
Publication date: 29 July 2019

Sanjeet Singh, Nav Bhardwaj, Gagan Deep Sharma, Tuğberk Kaya, Mandeep Mahendru and Burak Erkut

This paper aims to consolidate and review the literature in the field of market-calibrated option pricing analysis. By doing so, the paper brings out the gaps in the…

Abstract

Purpose

This paper aims to consolidate and review the literature in the field of market-calibrated option pricing analysis. By doing so, the paper brings out the gaps in the extant literature and makes suggestions for future researchers in the field.

Design/methodology/approach

The methodology used in this research is inspired by the works of Ferreira et al. (2016), Jabbour (2013), Lage Junior and Godinho Filho (2010), Seuring (2013) and Sharma et al. (2018). A total of 1,500 papers written on the pricing of options globally are collated from the Web of Science ranging across 2010-2018.

Findings

Most of the research papers present mathematical proposals to value options; without calibrating it with real market data points. The authors bring out five important gaps in the extant literature.

Originality/value

This is arguably the first study that consolidates the literature in the field of market calibrated option pricing analysis with a view to suggest directions for future researchers.

Details

Qualitative Research in Financial Markets, vol. 12 no. 2
Type: Research Article
ISSN: 1755-4179

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Article
Publication date: 8 May 2009

Glenn Pederson and Tianyu Zou

The purpose of this paper is to investigate how to incorporate market price risk into investment decisions. The investigation focuses on investments to expand ethanol…

Abstract

Purpose

The purpose of this paper is to investigate how to incorporate market price risk into investment decisions. The investigation focuses on investments to expand ethanol production facilities. The model is used to determine if such a real option approach can explain recent changes in the level of plant investment activity.

Design/methodology/approach

The paper demonstrates how real option analysis and Monte Carlo simulation can be used to evaluate ethanol plant investments by using available historical industry and market price data. We focus on existing small‐to‐medium, dry milling plants and the real option to expand the scale of operations. The binomial option pricing model is used to identify optimal strategies.

Findings

Increasing profitability and volatility appear to favor the strategy of investing during 2005‐2007. However, when the prices of corn and natural gas rise and plant profitability declines during 2007‐2008, the best strategy is increasingly to either postpone the investment or reject the decision to expand.

Originality/value

This paper is a first application of real option analysis to ethanol plant expansion decisions. The methodology used in the paper can be adapted by analysts, investors, and lenders in the ethanol industry to improve their investment analyses.

Details

Agricultural Finance Review, vol. 69 no. 1
Type: Research Article
ISSN: 0002-1466

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