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

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Eduardo S. Schwartz, Lenos Trigeorgis
MIT Press, 2004 - Business & Economics - 871 pages
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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 Net Present 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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Contents

An Overview
1
Finance Theory and Financial Strategy
19
Todays Options for Tomorrows Growth
33
Valuing Managerial Flexibility
47
The Options Approach to Capital Investment
61
A Conceptual Options Framework for Capital Budgeting
79
An Overview
103
A New Approach to Evaluating Natural Resource Investments
135
A Real Options Approach
419
Flexibility and Commitment in Strategic Investment
451
Strategic Growth Options
499
An Option Pricing Approach
517
A Logtransformed Binomial Numerical Analysis Method for Valuing
539
Finite Difference Methods and Jump Processes Arising in the Pricing
559
A Comparison of Alternative Option
571
Simulation and Numerical Methods in Real Options Valuation
601

Investment and Hysteresis
153
Real Options Revisited
179
Irreversibility Uncertainty and Investment
199
The Value of Waiting to Invest
253
Time to Build Option Value and Investment Decisions
273
Abandonment Value and Project Life
295
Irreversible Investment Capacity Choice and the Value of the Firm
313
Evaluating Natural Resource Investments
335
The Nature of Option Interactions and the Valuation of Investments
359
Strategy as a Portfolio of Real Options
385
The Value of Options in Strategic Acquisitions
405
TwentyFive Years Later
623
Case Studies on Real Options
641
The Case of a DualFuel Industrial Steam Boiler
663
A Real Options Application in NaturalResource Investments
679
Urban Land Prices under Uncertainty
719
An Application to the Construction
733
The Case of Offshore
773
Empirical Testing of Real OptionPricing Models
803
Investor Valuation of the Abandonment Option
823
Sources
855
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About the author (2004)

Eduardo S. Schwartz is the California Professor of Real Estate and Professor of Finance, Anderson Graduate School of Management, the University of California, Los Angeles.

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