Studying at York
Real Options Valuation - MAN00043H
- Department: The York Management School
- Credit value: 20 credits
- Credit level: H
- Academic year of delivery: 2022-23
- See module specification for other years: 2023-24
Module summary
The module will be present a balance between theoretical valuation principles and practical implementation using spreadsheet software.
Related modules
Pre-requisite modules
Co-requisite modules
- None
Prohibited combinations
- None
Additional information
Please note the stated prerequisite module requirements are not applicable to students taking BSc Actuarial Science or BSc Finance, Operations Research and Management degree programmes.
Module will run
| Occurrence | Teaching period |
|---|---|
| A | Spring Term 2022-23 |
Module aims
Many real-world investment projects allow decision makers (some) flexibility in the timing of the investment. For example, you can decide to build a new factory now or to postpone the decision until you have gathered more information about, say, market conditions for your products. This flexibility (or optionality) is very similar to the flexibility provided by derivative (financial) securities, such as options.
Therefore, many investment projects can be analysed using similar ideas to those underlying the valuation of (financial) options. Because of this analogy, investment projects with timing flexibility are called “real options”. This module develops the theory and practice of real options valuation in a simple discrete time (binomial tree) framework.
We extend the approach to situations where a firms’ competitor has a similar option; a situation common in practice and not commonly encountered with financial options
The module will be present a balance between theoretical valuation principles and practical implementation using spreadsheet software.
Among the topics to be discussed are
- recognising real options in a business context;
- arbitrage and valuing financial assets;
- principles for valuing real assets;
- the binomial model for evolving uncertainty;
- European-style real options;
- American-style real options;
- Non-exclusive real options.
Module learning outcomes
After successful completion the student is able to
Subject content
- describe the fundamental principles of real asset valuation and their application to investment problems;
- formulate investment projects as real options;
- value real options manually and by using spreadsheet software;
- discuss the managerial implications of real options valuation;
Academic and graduate skills
- analyse real-world investment problems in a consistent, academically informed framework;
- report technical analyses in clear, concise, and correct English.
Indicative assessment
| Task | % of module mark |
|---|---|
| Closed/in-person Exam (Centrally scheduled) | 100 |
Special assessment rules
None
Indicative reassessment
| Task | % of module mark |
|---|---|
| Closed/in-person Exam (Centrally scheduled) | 100 |
Module feedback
The timescale for the return of feedback will accord with School policy.
Module assessment reports to students are written by the module leader for all assessments (open and closed) and placed on the VLE after the Board of Examiners has received the module marks.
Indicative reading
Shockley, R.L. Real Options Valuation Thomson, 2007
Trigeorgis, L. Real Options MIT Press, 1996
Dixit, A. and R. Pindyck Investment under Uncertainty Princeton University Press, 1994
Chevalier-Roignant, B. and L. Trigeorgis Competitive Strategy MIT Press, 2011
Thijssen, J.J.J. A model for irreversible investment with construction and revenue uncertainty Journal of Economic Dynamics and Control (2015), 57, 250-266