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Real Options Valuation - MAN00043H

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• Department: The York Management School
• Module co-ordinator: Prof. Jacco Thijssen
• Credit value: 20 credits
• Credit level: H
• Academic year of delivery: 2021-22
  • See module specification for other years: 2022-23 2023-24

Module summary

The module will be present a balance between theoretical valuation principles and practical implementation using spreadsheet software.

Related modules

Additional information

Please note the stated prerequisite module requirements are not applicable to students taking BSc Actuarial Science or BSc Finance, Operations Research and Management degree programmes.

Module will run

Occurrence	Teaching period
A	Spring Term 2021-22

Module aims

Many real-world investment projects allow decision makers (some) flexibility in the timing of the investment. For example, you can decide to build a new factory now or to postpone the decision until you have gathered more information about, say, market conditions for your products. This flexibility (or optionality) is very similar to the flexibility provided by derivative (financial) securities, such as options.

Therefore, many investment projects can be analysed using similar ideas to those underlying the valuation of (financial) options. Because of this analogy, investment projects with timing flexibility are called “real options”. This module develops the theory and practice of real options valuation in a simple discrete time (binomial tree) framework.

We extend the approach to situations where a firms’ competitor has a similar option; a situation common in practice and not commonly encountered with financial options

The module will be present a balance between theoretical valuation principles and practical implementation using spreadsheet software.

Among the topics to be discussed are

• recognising real options in a business context;
• arbitrage and valuing financial assets;
• principles for valuing real assets;
• the binomial model for evolving uncertainty;
• European-style real options;
• American-style real options;
• Non-exclusive real options.

Module learning outcomes

After successful completion the student is able to

Subject content

• describe the fundamental principles of real asset valuation and their application to investment problems;
• formulate investment projects as real options;
• value real options manually and by using spreadsheet software;
• discuss the managerial implications of real options valuation;

Academic and graduate skills

• analyse real-world investment problems in a consistent, academically informed framework;
• report technical analyses in clear, concise, and correct English.

Assessment

Task	Length	% of module mark
Online Exam -less than 24hrs (Centrally scheduled) Real Options Valuation	3 hours	100

Special assessment rules

None

Additional assessment information

The computer assessment consists of students preparing an Excel spreadsheet for a valuation problem under exam conditions.

Reassessment

Task	Length	% of module mark
Online Exam -less than 24hrs (Centrally scheduled) Real Options Valuation	3 hours	100

Module feedback

The timescale for the return of feedback will accord with TYMS policy.

Module assessment reports to students are written by the module leader for all assessments (open and closed) and placed on the VLE after the Board of Examiners has received the module marks.

Indicative reading

Shockley, R.L. Trigeorgis, L. Dixit, A. and R. Pindyck Chevalier-Roignant, B. and L. Trigeorgis Thijssen, J.J.J.

Real Options Valuation Real Options Investment under Uncertainty Competitive Strategy A model for irreversible investment with construction and revenue uncertainty

Thomson, 2007 MIT Press, 1996 Princeton University Press, 1994 MIT Press, 2011 Journal of Economic Dynamics and Control (2015), 57, 250-266