Use Of Real Options Research Articles

РЕАЛЬНІ ОПЦІОНИ ЯК ФІНАНСОВІ ІНСТРУМЕНТИ СПРИЯННЯ ВІДБУДОВІ ПІСЛЯВОЄННОЇ ЕКОНОМІКИ УКРАЇНИ

Using the example of the Ukrelektromash plant, the application of various types of real options is considered depending on the development of the project scenario for the production and sale of rotary hybrid engines. The conditions and criteria for the application of option mechanisms are defined, taking into account the impact of risks, which is reflected in the assessment of the probabilities of the development of one or another type of scenario. The effectiveness of using abandonment and switching real options to a related type of activity in the event of a pessimistic development of cash flow and options to expand and replicating experience real option in the event of an optimistic scenario has been proven. At the same time, the degree of effectiveness of the manager's actions is shown, depending on the results of the project's cash flows after the first year of implementation. It has been established that real options are able to generally increase the strategic value of international investment projects, creating conditions for the post-war reconstruction of Ukraine's industry and encouraging the cooperation of foreign investors. In this way, the use of real options enables the manager to take effective measures to manage risks and cash flows, improving the degree of attractiveness of investment projects, and thereby opening new opportunities for cooperation with foreign partners. The implementation of programs with the use of real options becomes necessary when the investor is wary of investing in the development of the country after the end of the war, and at the same time sees great potential for the development of various sectors of the economy. Reducing the degree of riskiness of projects with the help of real options contributes to the gradual restoration of industrial capacities, the acceleration of money circulation, and the improvement of trade and financial operations on international markets.

TEORIA DAS OPÇÕES REAIS E CLASSIFICAÇÃO DE PACIENTES POR DIAGNOSIS RELATED GROUPS: COMO ESSES DIFERENTES CAMPOS PODERIAM SE RELACIONAR?

ABSTRACT In a complex environment, the managers of hospital organizations should take hard decisions all the time. Therefore, tools and techniques, which seek to understand the past and project the future, are very important. In some situations, the complexity encountered requires the transfer of knowledge from other areas, to find solutions and develop tools that provide efficient management of resources. In this scenario, this article has the main objective to present a theoretical discussion that brings the relationship between the Theory of Real Options and the Diagnosis Related Groups, to identify possible points that underlie the use of real options in Diagnosis Related Groups. The results demonstrate that, with the patient's condition as the focus, both are applied in the hospital environment with the objective of supporting decision-making, but not together. In addition, the differences observed make the combination of some of its concepts relevant for decision-making.

Use of Real Options for the Coordination of a Coalition of Small Growers with a Buyer

Use of Real Options for the Coordination of a Coalition of Small Growers with a Buyer

Managing flood risks in a changing climate

Managing flood risks in a changing climate

Use of real options to enhance water-energy nexus in mine tailings management

The tailing storage facility is the largest water sink in most mines. An incorrect management of water content in mine tailings can become a threat to their stability, and consequently, their environmental safety. Also, water reuse and recycling are plausible options to mining companies for reasons pertaining to water scarcity. Dewatering technologies for tailings, desalination and water transport are energy intensive. Proper handling of mine tailings and water supply management can considerably improve the water-energy nexus. This article evaluates the water-energy nexus in copper mining companies using a water reduction model focused on mine tailing facilities and water supply to the mine site to find the trade-offs between water and energy. The originality of this work consists in the application of a real options approach, enabling to increase the flexibility of decision-making thanks to quantitative analysis. This approach deploys the Monte Carlo simulation to perform sensitivity and uncertainty analysis to evaluate every cost component of water management strategy. Results show that if seawater is the primary source of raw water to the mining plant, water transport represents the largest cost due to the use of energy. So, improving the reuse of water by using dewatering technologies will improve the water-energy nexus, by improving energy consumption. Even though the costs of these technologies are elevated because they are energy-intensive, reduction of water use requirements in the mine will reduce the cost of its treatment and transport.

Foreign operation mode flexibility: tradeoffs and managerial responses

Firms’ ability to change foreign operation modes appears highly desirable in an increasingly volatile and unpredictable global environment. We propose and discuss mode flexibility as a management capability, with the aim at curbing the potential downsides of flexibility; in particular, the extra costs of coordination and contracting as well as revenue losses due to diminished partner commitment. We model the balancing and shifting of essential tradeoffs in relation to the two dimensions of mode flexibility – multiplicity and switchability – and highlight modularization and reciprocal use of real options as examples of tradeoff-shifting mechanisms that may improve the cost-benefit balance of mode flexibility.

Real Options and Reduction of Basic Risk of Index‐Based Climate Agricultural Insurance

AbstractThis article is a discussion of the concept of index‐based agricultural insurance and the possible role of real options to reduce the basic risk. Indeed, to address the consequences of variability of weather within climate, experiments based on indexed agricultural insurance have been implemented in recent years. However, this locally defined insurance scheme has a weak point called the basic risk, i.e., the difference between the reality of climatic shocks and the payment of compensation. Real options allow this gap to be filled by offering alternatives to farmers. This article is the first to discuss the use of real options in the basic risk management of index‐based climate agricultural insurance. The implications for farmers in developing countries, insurers, and local and institutional organizations and communities are important: better management of operating conditions, optimized financial management, and consideration of real climatic conditions.

Connecting Uncertainty, Hybrid Entrepreneurship, and Performance Through Real Options Reasoning

Recent theoretical work has suggested that hybrid entrepreneurship may be an effective strategy for managing uncertainty because it embodies the use of real options reasoning. This research project utilizes principles of real options reasoning to develop and test hypotheses related to the antecedents and outcomes of hybrid entrepreneurship. As evidenced by the curvilinear relationship between uncertainty and the likelihood of hybrid entry into entrepreneurship, our results show that entrepreneurs appear to employ some form of real options logic in decision-making, as it relates to managing uncertainty. Furthermore, although those who start as hybrid entrepreneurs maintain involvement with their ventures longer than do those who enter self-employment on a full- time basis, the sales of the ventures of hybrid entrepreneurs grow more slowly. Perhaps the primary insight is that the use of real options logic under conditions of uncertainty necessitates adopting a long-term perspective by entrepreneurs, policy-makers, and potential resource providers. Aligning the perspectives of these three groups may help hybrid entrepreneurs to be more successful over time.

Оценка эффективности инновационного проекта по созданию производства биотоплива с использованием опционного и нечетко-множественного анализа

Implementation of innovative projects at first stages is associated with risks determined by high uncertainty of cash flows. As such, the application of standard methods to analyze the project’s economic efficiency does not allow us to give reliable estimates of the forecast dynamics of economic indicators. All this requires the development of special techniques for the analysis of the effectiveness of innovation spending. The use of real options as well as fuzzy sets approach seems to be a basic conceptual focus for the further improvement of these methods. The paper contains the results of the effectiveness estimation for an innovative project aimed at establishing motor fuel production from high energy biomass with the use of option and fuzzy sets analysis. The use of the proposed fuzzy sets methods makes it possible to complement the traditional financial analysis and quantitatively estimates sustainability of different indicators of the innovative project efficiency to a change in exogenous parameters. Besides, it could be rather useful to identify the project’s bottlenecks. Moreover, the application of this method allows to quantitatively estimate reliability of the calculated project effectiveness indicators. Hardly can such estimations be made by means of traditional methods of financial analysis; either low or high reliability of the obtained effectiveness indicators could serve as an additional argument in favor of negative or positive decision on the project finance, allowing a venture capital fund to allocate the resources among the analyzed innovative projects more efficiently. On the whole, the use of the real options combined with the fuzzy sets method is sure to expand venture capital tools used for financial justification of submitted projects.

Использование реальных опционов при реализации высокорисковых проектов, например, металлургических компаний.

Использование реальных опционов при реализации высокорисковых проектов, например, металлургических компаний.

Innovative projects with real options in textile production: evaluation of their effect

The article raises a relevant topic - increasing the objectivity of assessing the effect of innovative projects with real options in the textile industry. The purpose of this article is to offer recommendations for assessing the effect of innovative projects with real options implemented in the textile industry. The novelty of the article is to identify trends in the development of textile production in Russia and to propose a mathematical model for assessing the effect of innovative projects with real options implemented in textile production. A forecast and an analysis of the main strategic directions of development of the Russian textile industry until 2025 were made. It was concluded that the use of real options changes approaches to innovative projects implemented by textile enterprises, which can lead to a change in the nomenclature and assortment produced within the framework of this project and the enterprise in overall textile products and the extent of its supply.

USING REAL OPTIONS IN AN INVESTMENT VALUATION AND DECISION-MAKING PROCESSES

The current stage of global development is characterized by opportunities for investment activity, along with an instability of the economic situation and high uncertainty, dictates the need for investors and managers to make effective decisions, taking into account constantly changing conditions. An investor, while making a decision which project to accept, for the most part, uses the standard methods of financial management as a basis for forecasting and analysis. Considering fast-moving processes of technology change, as well as the conditions of market uncertainty, significant risk and agency problems, the article proposes the use of real options as an insurance (hedging) tool for investors against risks at different stages of the investment project. Risk management can be carried out through real options - the tool of flexibility in decision making. Traditional assessment methods ignore the ability to adapt internal and external changes, however management flexibility can significantly reduce risks, and therefore create additional value.

Dynamic transfer pricing under conditions of uncertainty – the use of real options

PurposeThis paper aims to examine the applicability of real options methodology with respect to developing internal transfer pricing mechanisms. A pervasive theme in existing models is their inability to handle the dynamic and volatile nature of today’s business environment, as well as their lack of objective managerial flexibility. The authors address these and other issues and develop a transfer pricing mechanism based on Black–Scholes and the binomial options pricing methodology, which is better suited in today’s dynamic business environment.Design/methodology/approachThe authors use a conceptual approach in developing theoretical justifications and show, practically, how a transfer price can be developed using two different real options pricing models.FindingsThe authors find that real options transfer price mechanism (real options framework [ROF]) can effectively deal with many of the issues that permeate a modern organization with complex multi-dimensional operations. The authors argue that uncertainty and behavioral issues commonly associated with setting transfer prices are better handled using a transfer pricing mechanism that preserves flexibility at the business unit level, the managerial level and the firm level. The approach allows for different managerial styles in both centralized and decentralized sub-units within the same organization. The authors argue that an open multi-dimensional framework using real options is suitable under conditions of uncertainty and managerial opportunism.Practical implicationsROF-based transfer pricing may be significant in that firms can use it as a tool to manage an organization by setting the prices centrally and at the same time allowing managers to select the transfer price that best suits their specific situation and operating conditions. This may result in a more efficient and more profitable organization.Originality/valueThe contribution of the paper is the melding of the ROF from the finance literature with the accounting problem of setting a transfer price for items lacking a competitive market price. The authors also contribute to existing research by explicitly developing a framework that values managerial flexibility, takes into account uncertainty and considers the behavioral aspects of the transfer pricing process. The authors establish the conditions under which a generic real options model is a feasible alternative in determining a transfer price.

Real Options Framework for Dealing with Uncertainty in Project Management: A Moroccan Infrastructure Project

The Real Options Valuation allows for the consideration of possible options that are instinctively embedded in investment projects, in which the decision-makers have the flexibility to respond to the outcome of uncertainty. The business managers’ abilities to react to future market conditions tend to impact the value of the investment project by maintaining or improving the upside potential and limiting the downside loss. This process must be regulated by a decision analysis model, capable of capturing the particularities of each project. This paper presents detailed literature review of the real options, includes their area of applications in the literature, then proposes a framework to ease the understanding and the use of this method. Later, a case study of a Moroccan infrastructure project, that had already undergone an evaluation, is outlaid. The paper fully addresses the gaps of the previous study, provides a corrected model for an improved valuation of this project and a suitable use of real options. It also illustrates its application and analyzes the obtained results.

Capital budgeting decision-making practices: evidence from Pakistan

PurposeThe purpose of this paper is to examine the current trends of capital budgeting practices (analysis techniques, discount rate estimations and risk assessment methods) among Pakistani listed firms and analyze the responses conditional on firms’ demographics and executive characteristics.Design/methodology/approachAn online questionnaire was sent via e-mail to top 200 non-financial firms (in terms of market capitalization) listed on Pakistan Stock Exchange.FindingsWith a response rate of 35 percent, it is concluded that the theory–practice gap is low as Pakistani listed firms are using discounted cash flow methods of capital budgeting and preferring net present value over internal rate of return. Similarly, weighted average cost of capital is estimated using target value weights, and capital asset pricing model (with extra risk factors) is used to determine the cost of equity capital. For risk assessment, sensitivity analysis and scenario analysis are the dominant approaches; however despite the theoretical superiority, the use of real options is very low. Overall, investment decision responses significantly differ across firm’s demographics and executive characteristics.Practical implicationsPakistani business schools need to address the low usage of advanced methods such as modified internal rate of return and real options among Pakistani listed firms.Originality/valueThis is the first comprehensive study on the topic in Pakistan and have highlighted the areas of capital budgeting where Pakistani firms’ practices deviates from finance theory.

Модель опционного ценообразования при расчете величины чистых активов

В условиях неопределенности могут быть реализованы различные варианты денежных потоков и, соответственно, получены разные оценки эффективности, что затрудняет процесс обоснования стратегических управленческих решений. Решение проблемы может быть достигнуто сочетанием методов дисконтирования денежных потоков и реальных опционов.
 Цель статьи ― выявление особенностей количественной оценки реальных и чистых активов фирмы с использованием модели опционного ценообразования. Используются методы дисконтирования денежных потоков, реальных опционов, оценки объектов реального инвестирования и чистых активов. Новизной статьи является формализация процесса оценки чистых активов и ожидаемого эффекта от процесса приобретения и реализации реальных активов с использованием реальных опционов, на основе сочетания методов дисконтирования денежных потоков и реальных опционов. 
 В статье проанализированы МСФО и российский опыт учета стоимости реальных и чистых активов фирмы с использованием в отчетности метода дисконтирования денежных потоков, предложены рекомендации по повышению эффективности управлении бухгалтерскими рисками и страхования объектов реального инвестирования посредством использования реальных опционов и дополнительных возможностей, содержащихся в процессах инвестирования реальных активов. Предложены формулы оценки эффективности реального актива-инновации и ожидаемого чистого дисконтированного дохода от соответствующего чистого актива и от всех чистых активов фирмы в условиях риска и неопределенности с использованием встроенных в них реальных опционов и учете стоимости связанных с ними обязательств.
 Полученные результаты показали, что объективные расчет и учет стоимости реальных опционов на объекты реального инвестирования и количественная оценка реальных и чистых активов являются важными инструментами повышения эффективности формирования инвестиционного портфеля фирмы, являются ключевыми при принятии стратегического инвестиционного решения.

Использование реальных опционов как метод снижения рисков для принятия проектных решений в нефтегазовой промышленности

Использование реальных опционов как метод снижения рисков для принятия проектных решений в нефтегазовой промышленности

Fintech: Ecosystem, business models, investment decisions, and challenges

Fintech brings about a new paradigm in which information technology is driving innovation in the financial industry. Fintech is touted as a game changing, disruptive innovation capable of shaking up traditional financial markets. This article introduces a historical view of fintech and discusses the ecosystem of the fintech sector. We then discuss various fintech business models and investment types. This article illustrates the use of real options for fintech investment decisions. Finally, technical and managerial challenges for both fintech startups and traditional financial institutions are discussed.

Does Real Options Reasoning Support or Oppose Project Performance? Empirical Evidence from Electronic Commerce Projects

There is a consensus among scholars that real options reasoning is crucial for improving project performance but there has been little empirical support thus far; hence, we explore how real options reasoning may influence project timeliness, efficiency, and effectiveness. Our longitudinal analysis of 110 electronic commerce projects, drawn from new technology ventures, indicated the differential effects of real options reasoning on project performance. We find that higher uncertainty does not always lead to a greater use of real options reasoning. Although perceived environmental state uncertainty is positively linked to real options, perceived environmental effect and response uncertainty are not.

A real options game of alliance timing decisions in biopharmaceutical research and development

In this article we examine the alliance timing trade-off facing both pharmaceutical and biotech firms in a stochastic and competitive environment. Specifically, we introduce a real options game (ROG), where a pharmaceutical company can choose between two competing biotech firms by sequentially offering a licensing deal early or late in the new drug development process. We find that, when the alliance raises the drug market value significantly, the agreement is signed late in the drug development process. This suggests that the postponement effect implied by the use of real options prevails over the biotech firms’ competition effect, which would instead play in favor of an early agreement for pre-emption reasons. When the alliance does not raise the drug market value significantly, the optimal timing depends on the level of royalties retained by the pharmaceutical company. In particular, an early agreement is signed in the presence of a low level of royalties. In this case, indeed, the competition effect becomes predominant because the pharmaceutical company can substantially reduce the upfront payment and thus the potential loss incurred if the biotech partner does not exercise her option to continue the new drug development process. We also show that the alliance timing outcomes of our real options game considerably differ from those obtained when both parties use the net present value (NPV) to assess their payoffs.