Real Options and Investment under Uncertainty: Classical Readings and Recent Contributions

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The study of investment under uncertainty was stagnant for several decades, until recent developments in real options provided the tools to revitalize the field. The techniques and insights derived from option pricing can now be used to quantify the elusive elements of managerial operating flexibility and strategic interactions ignored or underestimated by conventional NetPresent Value and other quantitative approaches.Topics covered include the reasons for the under-investment problem and conceptual frameworks for viewing productive investment opportunities as real options; useful valuation building blocks; the quantifying of various types of real options separately and in combination; strategic aspects of investment under uncertainty; numerical analysis techniques; a variety of applications, including the valuing of natural resources, R&D and pioneer ventures, land development, strategic acquisitions, government subsidies, power plants and pollution options, flexible manufacturing, and multinational operations; and empirical evidence from oil leasing, land prices, and discontinued operations.

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What People Are Saying

From the Publisher
"A book of carefully chosen readings on real options is long overdue; the recognition that nearly every serious investment decision has important embedded options has spawned a growing and vibrant literature. Real Options and Investment Uncertainty will be an indispensable reference for both the practitioner who is looking for guidance and the academic who would like to know more about this new research area." Stephen Ross, Franco Modigliani Professor of Finance and Economics,Massachusetts Institute of Technology
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Product Details

  • ISBN-13: 9780262693189
  • Publisher: MIT Press
  • Publication date: 9/1/2004
  • Edition description: New Edition
  • Pages: 881
  • Product dimensions: 7.00 (w) x 9.00 (h) x 1.50 (d)

Meet the Author

Lenos Trigeorgis is the Bank of Cyprus Chair Professor of Finance in the School of Economics and Management at the University of Cyprus and Professor of Finance at King's College of theUniversity of London. He is the author of Real Options (MIT Press),Strategic Investment, and other books.

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Table of Contents

1 Real options and investment under uncertainty : an overview 1
I Underinvestment and conceptual options approaches 17
2 Finance theory and financial strategy 19
3 Today's options for tomorrow's growth 33
4 Valuing managerial flexibility 47
5 The options approach to capital investment 61
6 A conceptual options framework for capital budgeting 79
II Review of some basic models 101
7 Real options : an overview 103
8 A new approach to evaluating natural resource investments 135
9 Investment and hysteresis 153
10 The general flexibility to switch : real options revisited 179
11 Irreversibility, uncertainty, and investment 199
III Valuing various real options 251
12 The value of waiting to invest 253
13 Time to build, option value, and investment decisions 273
14 Abandonment value and project life 295
15 Irreversible investment, capacity choice, and the value of the firm 313
16 Evaluating natural resource investments 335
17 The nature of option interactions and the valuation of investments with multiple real options 359
IV Strategy and competition 383
18 Strategy as a portfolio of real options 385
19 The value of options in strategic acquisitions 405
20 Capital budgeting for interrelated projects : a real options approach 419
21 Flexibility and commitment in strategic investment 451
22 Strategic growth options 499
23 Investment in technological innovations : an option pricing approach 517
V Numerical techniques 537
24 A log-transformed binomial numerical analysis method for valuing complex multi-option investments 539
25 Finite difference methods and jump processes arising in the pricing of contingent claims : a synthesis 559
26 Valuation by approximation : a comparison of alternative option valuation techniques 571
27 Simulation and numerical methods in real options valuation 601
VI Applications 621
28 Applications of option-pricing theory : twenty-five years later 623
29 Scientific management at Merck : an interview with CFO Judy Lewent 633
30 Case studies on real options 641
31 The value of flexibility : the case of a dual-fuel industrial steam boiler 663
32 A real options application in natural-resource investments 679
33 Managing investment opportunities under price uncertainty : from "last chance" to "wait and see" strategies 689
34 Urban land prices under uncertainty 719
35 Investments of uncertain cost : an application to the construction of nuclear power plants 733
36 Operating flexibility, global manufacturing, and the option value of a multinational network 743
VII Empirical evidence 771
37 Option valuation of claims on real assets : the case of offshore petroleum leases 773
38 Empirical testing of real option-pricing models 803
39 Investor valuation of the abandonment option 823
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