Base Knowledge
Even though there are no formal pre-requisites, basic knowledge of finance, calculus, statistics and financial derivatives are welcomed.
Teaching Methodologies
The teaching methodology will be based on the following format and teaching methods:
Expositional sessions: Consists on the presentation of the topics of the course using the lecture notes and some papers previously distributed to the students.
Practical sessions: All the expositional sessions will be complemented through an intensive use of practical examples in Excel and/or Matlab and/or Python to discuss and solve some of the methodological and computational issues of the covered subjects.
Learning Results
The main purpose of this course is to enable students to understand the limitations of the traditional approach for valuing investments on real assets and know how to use the real options approach for valuing investments under uncertainty.
At the end of the course, a successful student should be able to:
1. Analyze capital budgeting decisions using the traditional approach;
2. Perform a sensitivity analysis to the main risk factors in an investment decision;
3. Analyze and determine the value of real options in investment decisions.
Program
1. A recap of the traditional capital budgeting approach
1.1. The traditional approach
1.2. The probabilistic approach
1.3. Limitations
2. Real options theory
2.1. Basic concepts
2.2. Valuing managerial flexibility
2.3. Analytical models and numerical methods
2.4. Hitting times
2.5. Investment and divestment decisions
2.6. Compound option of investment with the subsequent option to exit
2.7. Costly and costless reversible cases and economic hysteresis
2.8. Investment decisions with random investment costs
2.9. Optimal incentive policies for investment: subsidies and taxes
2.10. Alternatives to the GBM assumption: ABM, mean-reversion, non-constant volatility and jumps
3. Real options applications
3.1. Decision to invest in a project with no operating costs
3.2. Decision to invest in a project with temporary suspension
3.3. Combined entry and exit decisions
3.4. Caps, floors and collars
3.5. Real options, auctions and games
3.6. Applications in energy projects
Curricular Unit Teachers
Internship(s)
NAO
Bibliography
Basic:
– Dias, J.C. (2024). Real Options, Lecture Notes, Iscte Business School.
Complementary:
– Copeland, T. and Antikarov, V. (2003). Real Options: A Practitioner’s Guide, Cengage Learning.
– Dixit, A.K. and Pindyck, R.S. (1994). Investment under Uncertainty, Princeton University Press.
– Mun, J. (2005). Real Options Analysis: Tools and Techniques for Valuing Strategic Investment and Decisions, 2nd edition, Wiley.
– Smit, H.T.J. and Trigeorgis, L. (2004). Strategic Investment: Real Options and Games, Princeton University Press.
– Trigeorgis, L. (1996). Real Options: Managerial Flexibility and Strategy in Resource Allocation, MIT Press. Several published papers.