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: 2019-20

Module summary

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

Module will run

Occurrence Teaching cycle
A Spring Term 2019-20

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
Essay/coursework
Computer Based Assessment
1.5 hours 30
University - closed examination
Real Options Valuation
2 hours 70

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
University - closed examination
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



The information on this page is indicative of the module that is currently on offer. The University is constantly exploring ways to enhance and improve its degree programmes and therefore reserves the right to make variations to the content and method of delivery of modules, and to discontinue modules, if such action is reasonably considered to be necessary by the University. Where appropriate, the University will notify and consult with affected students in advance about any changes that are required in line with the University's policy on the Approval of Modifications to Existing Taught Programmes of Study.