Real options valuation | EPFL Graph Search

Real options valuation, also often termed real options analysis, (ROV or ROA) applies option valuation techniques to capital budgeting decisions. A real option itself, is the right—but not the obligation—to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project. For example, real options valuation could examine the opportunity to invest in the expansion of a firm's factory and the alternative option to sell the factory. Real options are generally distinguished from conventional financial options in that they are not typically traded as securities, and do not usually involve decisions on an underlying asset that is traded as a financial security. A further distinction is that option holders here, i.e. management, can directly influence the value of the option's underlying project; whereas this is not a consideration as regards the underlying security of a financial option. Moreover, management cannot measu

Assessment and valuation of high growth companies

Patrik Frei

Valuation is a key topic in the financing and development of high growth companies. The goal of this study is to bridge the existing gap between the assessment of a company and the financial valuation. Many models exist to capture soft factors, and many more studies have been conducted to understand financial valuation models. In this study, the first step is to develop an assessment framework to capture the value drivers for high growth companies. Based on literature research, an empirical study with 52 valuations, and an iterative process this assessment framework has been built. It contains the following three main factors: Management Market environment Product, Sciences & Technology Each of these main criteria contain a number of sub-criteria shown in Figure 1. For each criterion, a rating between 1 and 6 is given with a specific scale that can be implemented in practice for high growth companies. Even though every company is different, the provided framework allows a systematic and transparent assessment of a high growth company. The proposed valuation methods are specifically targeted for high growth companies and include operational based methods such as discounted cash flow and option pricing, as well as relative methods such as the market comparable and comparable deal methods. Some others, such as the venture capital method, are also a combination of an operational and relative approach. The methodical assessment framework enables a link to be made with the financial valuation models to obtain a consistent and comprehensive assessment and valuation approach for high growth companies. The link is made by splitting up the discount rate into different premiums and by introducing a calculation schema. The assessment framework and its criteria have been tested in an empirical study to find correlations between the success of a company and the provided rating/framework. With the available sample of 25 valuations, this correlation could be shown for the market environment and the product, science & technology. For the management factor, it was not possible to show a statistical significance, even though practical experience had shown that management is a key factor. A main reason why no statistical significance was shown could be that the management team can be changed very quickly. Assessment and valuation of high growth companies 2 Thus, the assessment and valuation is a done at a specific moment in time but did not capture the development of the management team. However, in conclusion, the assessment and valuation is still an art. The proposed framework provides a roadmap to becoming an artist in this field and should serve as a practical guideline.

EPFL2005

Efficient Pricing of Energy Derivatives

Anders Trolle

I present a tractable framework, first developed in Trolle and Schwartz (2009), for pricing energy derivatives in the presence of unspanned stochastic volatility. Among the model features are i) a perfect fit to the initial futures term structure, ii) a fast and accurate Fourier-based pricing formula for European-style options on futures contracts, enabling efficient calibration to liquid plain-vanilla exchange-traded derivatives, and iii) the evolution of the futures curve being described in terms of a low-dimensional affine state vector, making the model ideally suited for pricing complex energy derivatives and real options by simulation. I also consider an extension of the framework that takes jumps in spot prices into account.

Palgrave Macmillan US2014

Pricing expropriation risk in natural resource contracts – A real options approach

Anders Trolle

We develop a model for pricing expropriation risk in natural resource projects, in particular an oil field. The government is viewed as holding an American-style option to expropriate the oil field, but facing the following three possible expropriation costs: A state-run company may produce oil less cost-efficiently than a private firm,the government may have to pay a compensation to the firm, and an expropriation may trigger lower investor confidence negatively affecting the overall economy. The dynamics of key variables – the spot price, futures prices and volatility – is described by a model proposed and estimated in Trolle and Schwartz (2007). For reasonable parameter values and under market conditions not too different from what has been seen in recent years, the value of the expropriation option can be substantial

MIT press2010

Assessment and valuation of high growth companies

Patrik Frei

EPFL2005