Options Final 2010
- 1. Options
- 2. Before we start…3Student PresentationsSumming up based on the live-tweets7IntroductionIntroducing Real Options11IdentifyIdentifying options28ValueHow to value Real Options33ManageStrategy as a portfolio of real options53SummarySumming real options up60The ExamHow to do great at the exam!62
- 4. .. I need three volunteers?Before We Start…
- 5. Tweet key learnings… Before We Start…MCF10Control10Password:
- 6. Give a hand to thefellow students tweeting!Before We Start…
- 8. The assignment for every study group!Every study-group should find 10 tweets that:You find interesting / funnyThat can serve as a either a summary of the lectures or that explores an important topicReflect on these tweetsAs no one has uploaded a presentation we will turn this into a workshop – you have 20 minutesTwo groups will presentStudent Presentations
- 10. Student PresentationsIf not then it will be….
- 11. Introduction
- 12. IntroductionAn option is the right, but not the obligation, to buy (or sell) an asset for a predetermined price within a predeterminedperiod of time Options arefinancial derivatives traded in financialmarkets
- 13. IntroductionThe value of an option depends on: The time before exercising the option
- 14. The value of the underlying asset
- 15. The volatility of the asset
- 16. The strike price
- 17. The interest rate Definitions...Introduction
- 18. Life is Full of Options
- 19. Real OptionsIntroductionA Real Option is the right, but not the obligation, to invest in a business opportunity or chose a particular course of action for developing, growing or abandoning an opportunity.
- 20. A Real Option in R&DIntroductionIn R&D, the (real) option is to develop a new technology or product, the investment is the project and the (underlying) asset is the future cash flows from product sales.Real options are not traded in a market.
- 21. Real Option and management flexibilityIntroductionwatch & waitabandonengage & learnabandonstaged developmentcommit & commercializeabandoninvest & proceedscale up/downabandon
- 22. Staging option and phase developmentIntroductionearned value?proceed?earned value?proceed?product launchabandonabandoninitial investmentadditional investmentfinal investment
- 23. IntroductionStrategy is a sequence of optionsSo identify the options
- 24. Flexibility can be truly valuable
- 25. Driving without have a complete mapFor most companies strategy is like driving without a complete map. Strategy schools talk about planned vs. emergent strategyIntroductionPlanningDrivingTimeHaving an incomplete mapAdapt to signs, road andsituationTherefore it is important to identify and value your options and allow for management flexibility as new information arises
- 26. What are the alternatives to Real Options?Bets – GuessingNet Present Value – several problemsDecision Tree – disregards risk of underlying assetsIntroduction
- 27. Problems of traditional NPVIt assumes that not investing results in flat line business performance
- 28. It does not account for management flexibility – meaning that decisions can be deferred
- 29. It does not account for potential growth options
- 30. It does not value value delay and uncertainty to the same sophisticationIntroduction
- 31. Consider RO there is a high value of flexibilityIntroduction
- 33. How to work with Real OptionsIntroduction
- 34. Identify
- 35. Identify options – look for the clues…Identify”Phases”, ”StrategicInvestment”, ”Milestones”, ”Alternatives”, ”Scenarios”, etc...Examineprojectedcash flows: Identify the large investments – whichareoftendiscretionary – meaningtheyrequire a judgment and a decision.
- 36. Two conditions must be presentIdentify
- 37. Identify the important optionsIdentifyWhat are the important things managers will learn over timeHow will they use new informationWhich decisions will change following new information
- 38. 7S Framework – the different optionsIdentify
- 39. Value
- 40. ValueFlexibility has a value that should be accounted for in the valuation of a project
- 41. An investment opportunity as a Call optionValue
- 42. Value
- 43. ValueWhen do NPV and Option Pricingdiverge?WHEN THE INVESTMENT DECISIONS MAY BE DEFERRED
- 44. ValueConventional NPV misses the extravalueassociatedwithdeferralbecause it assumethat decisions can not be put off.In contrast option pricingpresumes the ability to defer and quantify the value of deferral
- 45. The two sources that drive value of deferralValue
- 46. Time Value of MoneyValueIt is more attractive to investlaterthansooner....thus the firstsource of value is the time value of the moneyuntil the decision no longer canbedeferred
- 47. Value of VolatilityValueUncertaintyThe value of the underlying asset can go up ordown – wedon’tknow
- 48. This relates to the metricsValueValue to CostNPVqCummulativeVolatility
- 49. The Value to Cost ratioValueValue to CostNPVqNPVq is a modification of the traditional NPV turned into a ratio
- 50. Value
- 52. Cumulative volatilityValueCumulativeVolatilityVariance of returns per unit of time multiplied with the number of periods - which expresses cumulative variance. Cumulative Volatility is the square root of the cumulative variance
- 53. Risk and VarianceValueHigh Variance = High RiskLow Variance = Low Risk
- 54. Uncertainty and volatility is influenced by timeValueLong time = Everything can happenShort time = Changes are predictable
- 56. Value
- 57. Appendix – A service from meValue
- 58. Potentially use a calculatorValue
- 59. Manage
- 60. Strategy as a Portfolio of Real Options
- 61. The Tomato Garden – Defined by Two Option ValueMetrics..Manage
- 62. Low volatilityManageVolatility is very low, meaning uncertainty has been resolved or the time has run out
- 63. Project that are in the moneyManageProjects are ”in the money” =NPV > 0Reasonable predictions?
- 64. Out of the money – but promising value-to-costManageOut of the Money, but pomising value to costReseanoble Predictions
- 65. The impact of time (holding everything else equal)ManageInterets that can be earned until investing decreasesUncertainty hasdecreased
- 66. Summary
- 67. SummarySummary
- 68. The Exam
- 69. The examNo bullshitting – I’ve been there recentlyBe pro-active – take initiativeRead the slidesUnderstand the key elements and connect the dotsPre-Prepare and make an effortThen you will do great!!The exam
Editor's Notes
- #3: Whenwilltherebe a break