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Datar–Mathews Method For Real Option Valuation
The Datar–Mathews Method (DM Method) is a method for real options valuation. The method provides an easy way to determine the real option value of a project simply by using the average of positive outcomes for the project. The method can be understood as an extension of the net present value (NPV) multi-scenario Monte Carlo model with an adjustment for risk aversion and economic decision-making. The method uses information that arises naturally in a standard discounted cash flow (DCF), or NPV, project financial valuation. It was created in 2000 by Vinay Datar, professor at Seattle University; and Scott H. Mathews, Technical Fellow at The Boeing Company. Method The mathematical equation for the DM Method is shown below. The method captures the real option value by discounting the distribution of operating profits at ''R'', the market risk rate, and discounting the distribution of the discretionary investment at ''r'', risk-free rate, ''before'' the expected payoff is calcul ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Real Options Valuation
Real options valuation, also often termed real options analysis,Adam Borison (Stanford University)''Real Options Analysis: Where are the Emperor's Clothes?'' (ROV or ROA) applies option valuation techniques to capital budgeting decisions.Campbell, R. Harvey''Identifying real options'' Duke University, 2002. A real option itself, is the right—but not the obligation—to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project. For example, real options valuation could examine the opportunity to invest in the expansion of a firm's factory and the alternative option to sell the factory.Nijssen, E. (2014) Routelegde, 2014. Real options are generally distinguished from conventional financial options in that they are not typically traded as securities, and do not usually involve decisions on an underlying asset that is traded as a financial security. A further distinction is that option holders here, i.e. ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Risk-averse
In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more certain outcome. Risk aversion explains the inclination to agree to a situation with a more predictable, but possibly lower payoff, rather than another situation with a highly unpredictable, but possibly higher payoff. For example, a risk-averse investor might choose to put their money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value. Example A person is given the choice between two scenarios: one with a guaranteed payoff, and one with a risky payoff with same average value. In the former scenario, the person receives $50. In the uncertain scenario, a coin is flipped to decide whether the person receives $100 or nothing. The ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Conditional Expectation
In probability theory, the conditional expectation, conditional expected value, or conditional mean of a random variable is its expected value – the value it would take “on average” over an arbitrarily large number of occurrences – given that a certain set of "conditions" is known to occur. If the random variable can take on only a finite number of values, the “conditions” are that the variable can only take on a subset of those values. More formally, in the case when the random variable is defined over a discrete probability space, the "conditions" are a partition of this probability space. Depending on the context, the conditional expectation can be either a random variable or a function. The random variable is denoted E(X\mid Y) analogously to conditional probability. The function form is either denoted E(X\mid Y=y) or a separate function symbol such as f(y) is introduced with the meaning E(X\mid Y) = f(Y). Examples Example 1: Dice rolling Consider the roll ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
IEEE
The Institute of Electrical and Electronics Engineers (IEEE) is a 501(c)(3) professional association for electronic engineering and electrical engineering (and associated disciplines) with its corporate office in New York City and its operations center in Piscataway, New Jersey. The mission of the IEEE is ''advancing technology for the benefit of humanity''. The IEEE was formed from the amalgamation of the American Institute of Electrical Engineers and the Institute of Radio Engineers in 1963. Due to its expansion of scope into so many related fields, it is simply referred to by the letters I-E-E-E (pronounced I-triple-E), except on legal business documents. , it is the world's largest association of technical professionals with more than 423,000 members in over 160 countries around the world. Its objectives are the educational and technical advancement of electrical and electronic engineering, telecommunications, computer engineering and similar disciplines. History Or ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
INFORMS
The Institute for Operations Research and the Management Sciences (INFORMS) is an international society for practitioners in the fields of operations research (O.R.), management science, and analytics. It was established in 1995 with the merger of the Operations Research Society of America (ORSA) and The Institute of Management Sciences (TIMS). Overview INFORMS promotes greater public awareness, interest, and understanding about the benefits of operations research (O.R.) and analytics and provides a variety of programs and services that support lifelong learning and networking for O.R. and analytics professionals. This includes publishing 16 peer-reviewed journals, hosting numerous conferences and meetings, providing continuing education courses and professional certification, and administering dozens of special-interest communities that help professionals network and collaborate with colleagues from around the world. INFORMS is a member of the International Federation of Operatio ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Monte-Carlo Simulation
Monte Carlo methods, or Monte Carlo experiments, are a broad class of computational algorithms that rely on repeated random sampling to obtain numerical results. The underlying concept is to use randomness to solve problems that might be deterministic in principle. They are often used in physical and mathematical problems and are most useful when it is difficult or impossible to use other approaches. Monte Carlo methods are mainly used in three problem classes: optimization, numerical integration, and generating draws from a probability distribution. In physics-related problems, Monte Carlo methods are useful for simulating systems with many coupled degrees of freedom, such as fluids, disordered materials, strongly coupled solids, and cellular structures (see cellular Potts model, interacting particle systems, McKean–Vlasov processes, kinetic models of gases). Other examples include modeling phenomena with significant uncertainty in inputs such as the calculation of risk in b ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Compound Option
A compound option or split-fee option is an option on an option. The exercise payoff of a compound option involves the value of another option. A compound option then has two expiration dates and two strike prices. Usually, compounded options are used for currency or fixed income Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the prin ... markets where insecurity exists regarding the option's risk protection. Another common business application that compound options are used for is to hedge bids for business projects that may or may not be accepted. Variants Compound options provide their owners with the right to buy or sell another option. These options create positions with greater leverage than do traditional options. There are four basic types of compound options: * Call on Call (CoC) * ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Monte Carlo Methods For Option Pricing
In mathematical finance, a Monte Carlo option model uses Monte Carlo methodsAlthough the term 'Monte Carlo method' was coined by Stanislaw Ulam in the 1940s, some trace such methods to the 18th century French naturalist Buffon, and a question he asked about the results of dropping a needle randomly on a striped floor or table. See Buffon's needle. to calculate the value of an option with multiple sources of uncertainty or with complicated features. The first application to option pricing was by Phelim Boyle in 1977 (for European options). In 1996, M. Broadie and P. Glasserman showed how to price Asian options by Monte Carlo. An important development was the introduction in 1996 by Carriere of Monte Carlo methods for options with early exercise features. Methodology In terms of theory, Monte Carlo valuation relies on risk neutral valuation.Marco DiasReal Options with Monte Carlo Simulation/ref> Here the price of the option is its discounted expected value; see risk neutrality an ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Lognormal Distribution
In probability theory, a log-normal (or lognormal) distribution is a continuous probability distribution of a random variable whose logarithm is normally distributed. Thus, if the random variable is log-normally distributed, then has a normal distribution. Equivalently, if has a normal distribution, then the exponential function of , , has a log-normal distribution. A random variable which is log-normally distributed takes only positive real values. It is a convenient and useful model for measurements in exact and engineering sciences, as well as medicine, economics and other topics (e.g., energies, concentrations, lengths, prices of financial instruments, and other metrics). The distribution is occasionally referred to as the Galton distribution or Galton's distribution, after Francis Galton. The log-normal distribution has also been associated with other names, such as McAlister, Gibrat and Cobb–Douglas. A log-normal process is the statistical realization of the multipl ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
List Of Probability Distributions
Many probability distributions that are important in theory or applications have been given specific names. Discrete distributions With finite support * The Bernoulli distribution, which takes value 1 with probability ''p'' and value 0 with probability ''q'' = 1 − ''p''. * The Rademacher distribution, which takes value 1 with probability 1/2 and value −1 with probability 1/2. * The binomial distribution, which describes the number of successes in a series of independent Yes/No experiments all with the same probability of success. * The beta-binomial distribution, which describes the number of successes in a series of independent Yes/No experiments with heterogeneity in the success probability. * The degenerate distribution at ''x''0, where ''X'' is certain to take the value ''x''0. This does not look random, but it satisfies the definition of random variable. This is useful because it puts deterministic variables and random variables in the same formalism. * Th ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Real Options Valuation
Real options valuation, also often termed real options analysis,Adam Borison (Stanford University)''Real Options Analysis: Where are the Emperor's Clothes?'' (ROV or ROA) applies option valuation techniques to capital budgeting decisions.Campbell, R. Harvey''Identifying real options'' Duke University, 2002. A real option itself, is the right—but not the obligation—to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project. For example, real options valuation could examine the opportunity to invest in the expansion of a firm's factory and the alternative option to sell the factory.Nijssen, E. (2014) Routelegde, 2014. Real options are generally distinguished from conventional financial options in that they are not typically traded as securities, and do not usually involve decisions on an underlying asset that is traded as a financial security. A further distinction is that option holders here, i.e. ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Binomial Options Pricing Model
In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. Essentially, the model uses a "discrete-time" ( lattice based) model of the varying price over time of the underlying financial instrument, addressing cases where the closed-form Black–Scholes formula is wanting. The binomial model was first proposed by William Sharpe in the 1978 edition of ''Investments'' (), and formalized by Cox, Ross and Rubinstein in 1979 and by Rendleman and Bartter in that same year. For binomial trees as applied to fixed income and interest rate derivatives see . Use of the model The Binomial options pricing model approach has been widely used since it is able to handle a variety of conditions for which other models cannot easily be applied. This is largely because the BOPM is based on the description of an underlying instrument over a period of time rather than a single point. As a consequence, it is used to value Am ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
