Reale Optioner: Hvorledes Projekter og Investeringer Værdisættes Under Usikkerhed (Real Options - How Projects and Investments are Valuated under Uncertainty)

Abstract

It is a well known fact by academia that traditional valuation methods like DCF and NPV underestimate investments by not including managers’ flexibility and are widely discussed in the financial press. This underestimation and managers’ flexibility is due to investments’ uncertainty and not including irreversibility and investment timing. In this thesis I look at how investments under uncertainty are valued by considering different real option methods. First I consider the numerical approximations methods; the binomial model, Monte Carlo simulation and finite difference method. After this I look at continues time models. Real option theory uses the fundamentals from the financial option theory but also has its differences. This includes the risk neutral pricing that makes it possible to discount at the risk free rate. I exemplifies with different option opportunities including the option to defer and the option to abandon an ongoing investment. This is done by considering the pharmaceutical industry that invests in a patented new drug. Such an investment has uncertainty regarding time and cost to completion, the future cash flow which will not be received before the investment is completed and possibility of a catastrophic event which will drive the value of the project down to zero. This investment problem is solved by the use of Lonfstaff & Schwartz least square Monte Carlo simulation.Lastly I look at why real option theory is not used more in practice and then state some secondary empirical results. Though real option theory has been known and studied by theorists in the last 30 years, it does not seem to have had the big impact in practice yet. As Hartmann & Hassan (2006) mention, academia has a challenge to develop more adequate models to boost acceptance. The question will not be to replace the NPV approach by real option pricing. In contrast, the aim should be a more realistic view of the advantages and disadvantages of both methods as well as using the right methods for the right tasks.