Real Options Valuation - MAN00043H

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Module summary

The module will be present a balance between theoretical valuation principles and practical implementation using spreadsheet software.

Related modules

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	Semester 2 2023-24

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.

The module will 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;

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

Feedback will be given in accordance with the University Policy on feedback in the Guide to Assessment as well as in line with the School policy.

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