The Appraisal of Assets’ Fair Value Using the Real Options Technique
https://doi.org/10.26794/2308-944X-2020-8-2-43-76
Abstract
The goal of this paper is to analyse and systematise the possible approaches to real options valuation, especially when considering the practical aspects of their application in real-life valuation problems. Therefore, the paper sets the following tasks:
To outline the concept of fair value and analyse the traditional approaches to its calculation in the context of asset valuation
To define the real-option approach to fair value estimation and analyse its theoretical background
To determine the role of the real options approach in the traditional system of valuation techniques
To analyse the practical aspects of their application in valuation problems considering the corresponding examples
To provide the real-life example of this technique applied in current market conditions using the recent data.
The object of this research is the option pricing models, and the subject is their application in estimation of real options embedded in corporate valuations, particularly considering the side.
About the Author
A. Gulabyan
Financial University
Russian Federation
Alexander Gulabyan - BA in Economics, International Finance Faculty, Department of World Economy and World Finance. Scientific advisor: Tsvirko Svetlana Eduardovna, Associate Professor, PhD in Economics
Russian Federation
Alexander Gulabyan - BA in Economics, International Finance Faculty, Department of World Economy and World Finance. Scientific advisor: Tsvirko Svetlana Eduardovna, Associate Professor, PhD in Economics
References
1. Al-Huniti, Nidal. (2013). Quantitative Decision–Making in Drug Development. AstraZeneca.
2. Angelis D.I. (2000). Capturing the options value of R&D. Research Technology Management.
3. Bauer, M. (2009). An analysis of the use of discounting cash flow methods and real options to value flexibility in real estate development projects, Lambert Academic Publishing, Berlin.
4. Black, F., Scholes, M. (1973). The pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637–654.
5. Branch, Marion A. (2003). Real Options in Practice. New York: Wiley.
6. Brennan, J., Schwartz, E. (1985). Evaluating Natural Resource Investments. The Journal of Business, 58(2), 135–157.
7. Brennan, M. J., Trigeorgis, L. (2000). Project Flexibility, Agency, and Competition. Oxford: Oxford University Press.
8. Bruslanova, N. (2004). Evaluation of investment projects using real options technique. Finansovyy director, 4, 20–23. (in Russian)
9. Bulan, L., Mayer, C., Tsuriel, Somerville C. (2009). Irreversible investment, real options, and competition: evidence from real estate development. Journal of Urban Economics, 65, 237–251.
10. Capozza, D., Li, Y. (1994). The intensity and timing of investment: the case of land. The American Economic Review, 84(4), 889–904.
11. Childs, P. D., Riddiough, T. J., Triantis, A. J. (1996). Mixed uses and the redevelopment option. Real Estate Economics, 24, 317–339.
12. Cox, J., Ross, S., Rubinstein, M. (1979). Options Pricing: a simplified approach. Journal of Financial Economics, 7, 229–263.
13. Cox, Ross, Rubinstein. (1979). Option Pricing: A simplified approach. Journal of Financial Economics, 7, 229–263.
14. Damodaran, Aswath. (2006). Damodaran on Valuation: Security Analysis for Investment and Corporate Finance. John Wiley & Sons.
15. Damodaran Aswath. (2012). Investment Valuation: Tools and Techniques for Determining the Value of any Asset. University Edition. Wiley Finance Series.
16. DePamphilis, D. (2017). Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions. Academic Press. Dixit, A. K., Pindyck, R. S. (1994). Investment under Uncertainty. Princeton, NJ: Princeton University Press.
17. Dixit, A. K. (1992). Investment and hysteresis. Journal of Economic Perspectives, 6, 107–132.
18. Folta, T. B., Miller, K. D. (2002). Real options in equity partnerships. Strategic Management Journal, 23, 77–88.
19. Geske, R. (1979). The valuation of compound options. Journal of Financial Economics, 7(1), 63–81.
20. Grenadier, S. R. (1995). Valuing lease contracts a real–option approach. Journal of Financial Economics, 38, 297–331.
21. Hertz, D. (1964). Risk Analysis in Capital Investment. Harvard Business Review, 42, 95–106.
22. Horn, A. et al. (2015). The Use of Real Options Theory in Scandinavia’s Largest Companies. International Review of Financial Analysis, 41(C), 74–81.
23. Howell, S. et al. (2001). Real Options. Evaluating Corporate Investment Opportunities in a Dynamic World. London: Financial Times Prentice Hall.
24. Huchzermeier, A., Loch, C. (2003). Evaluating R&D Projects as Real Options: Why More Variability is not always better. Working Paper, WHU Koblenz and INSEAD.
25. Kalinin, D. (2003). How to determine the “real” value of the investment project? An example of using the method of real options. Rynok tsennykh bumag [Securities market], 24, 62–65.
26. Karpova, N., Pocherin, N. (2000). Application of option theory in determination of value of R&D and license agreements. Voprosy otsenki [Assessment issues], 2, 57–66.
27. Krukovskiy, A. A. (2008). The method of real options in investment management. Trudy ISA RAN [Proceedings of ISA RAS], 37, 122–143.
28. Kulatilaka, N., Markus, A. J. (1992). Project valuation under uncertainty: where does DCF fail? Journal of Applied Corporate Finance, 5(3), 92–100.
29. Leslie, K. J., Michaels, M. P. (1998). Making real options real. The McKinsey Quarterly, 3, 128–141.
30. Leslie, K. J., Michaels, M. P. (2000). The real power of real options. The McKinsey Quarterly, 3, 4–22.
31. Leung, B.Y.P., Hui, E.C.M. (2002). Option pricing for real estate development: Hong Kong Disneyland. Journal of Property Investment & Finance, 20(6), 473–496.
32. Limitovskiy, М. А. (2017). Investitsionnyye proyekty i real’nyye optsiony na razvivayushchikhsya rynkakh: ucheb. posobiye dlya bakalavriata i magistratury [Investment projects and real options in emerging markets: study guide for undergraduate and graduate students], 5th editition. Moscow: Yurayt Publ.
33. Lucius, D. I. (2001). Real options in real estate development. Journal of Property Investment & Finance, 19(1), 73–78.
34. Majda, S., Pinduck, R. (1987). Time to build, Option Value and Investment Decisions. Journal of Financial Economics, 18, 7–27.
35. Mao, Y., Wu, W. (2011). Fuzzy Real Option Evaluation of Real Estate Project Based on Risk Analysis. Systems Engineering Procedia, 1, 228–235.
36. Mathews, S., Datar, V. (2007). A Practical Method for Valuing Real Options: The Boeing Approach. Journal of Applied Corporate Finance, 19(2), 95–104.
37. Milne, A., Whalley, A. E. (2000). Time to build, option value and investment decisions: a comment. Journal of Financial Economics, 56, 325–332.
38. Morano, P., Tajani, F. (2013). The transfer of development rights for the regeneration of brownfield sites. Applied Mechanics and Materials, 409–410, 971–978.
39. Mun, J. (2006). Real Options Analysis. Tools and techniques for valuing strategic investments and decisions. John Wiley & Sons.
40. Myers, Stewart C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175.
41. Pacheco-de-Almeida, G., Zemsky, P. (2003). The effect of time–to–build on strategic investment under uncertainty. Rand Journal of Economics, 34, 166–182.
42. Pirogov, N. K., Salomykova, O. A. (2007). Analysis of companies’ growth options in the emerging capital markets. Korporativnyye finansy [Corporate finance], 2(2), 32–42.
43. Pirogov, N. K., Zubtsov, N. (2008). Interaction of real options on the example of development projects in Russia. Korporativnyye finansy [Corporate finance], 6(2), 40–55.
44. Quigg, L. (1993). Empirical testing of real option–pricing models. Journal of Finance, 48(2), 621–39.
45. Rocha, K., Salles, L., Alcaraz, Garcia, F. A., Sardinha, J. A., Teixeira, J. P. (2007). Real estate and real options — a case study. Emerging Markets Review, 8, 67–79.
46. Schatzki, T. (2003). Options, uncertainty, and sunk costs: an empirical analysis of land use change. Journal of Environmental Economics and Management, 46, 86–105.
47. Shen, J., Pretorius, F. (2013). Binomial option pricing models for real estate development. Journal of Property Investment & Finance, 31(5), 418–440.
48. Shoup, D. (1970). The optimal timing of urban land development. Regional Science Association Papers, 25, 33–44.
49. Stewart, B. (2002). The quest for Value. Harper Collins.
50. Tan, Jackson J. (2018). Interfaces for enterprise valuation from a real options lens. Strategic Change, 27(1), 69–80.
51. Titman, S. (1985). Urban Land Prices Under Uncertainty. The American Economic Review, 75(3), 505–514.
52. Triantis, A. J., Hodder, J. E. (1990). Valuing flexibility as a complex option. Journal of Finance, 45, 549–565.
53. Trideorgis, L. (2003). Real options: Managerial flexibility and strategy in resource allocation. Cambridge, Mass: MIT Press.
54. Vonnegut, A. (2000). Real Options Theories and Investment in Emerging Economies. Emerging Markets Review, 1, 82–100.
55. Vygon, G. V. (2004). Estimation of the fundamental value of oil fields: the method of real options. Ekonomika i matematicheskiye metody [Economics and mathematical methods], 37(2), 54–69. Data-sources: Bloomberg Terminal Drugbank. Etelcalcetide. Available at: https://www.drugbank.ca/drugs/DB12865 (Retrieved 3 May 2019)
56. FDA Approves Amgen’s Parsabiv™ (Etelcalcetide), First New Treatment In More Than A Decade For Secondary Hyperparathyroidism In Adult Patients On Hemodialysis. Available at: https://www.amgen.com/media/newsreleases/2017/02/fda-approves-amgens-parsabiv-etelcalcetide-first-new-treatment-in-more-than-a-decade-forsecondary-hyperparathyroidism-in-adult-patients-on-hemodialysis (Retrieved 3 May 2019)
57. Official annual financial statements of Amgen Inc. U.S. National Library of Medicine National Center for Biotechnology Information. Etelcalcetide. Available at: https://pubchem.ncbi.nlm.nih.gov/compound/Velcalcetide (Retrieved 3 May 2019)
Review
For citations:
Gulabyan A. The Appraisal of Assets’ Fair Value Using the Real Options Technique. Review of Business and Economics Studies. 2020;8(2):43-76. https://doi.org/10.26794/2308-944X-2020-8-2-43-76
Email this article 