Sensitivity analysis of real options parameters

Author

Pei-Te Chung

Keywords and Phrases

Sensitivity analysis; Fianancial options-Greeks

Abstract

"Real options analysis is a popular, but not widely utilized project valuation method. Since its inception in the late 1970’s, real options have not had as much worldwide appeal as the discounted cash flow method. Real options, unlike the discounted cash flow method, attempts to give managers a way to value the flexibility of a project through options analysis.

Originally derived from financial options, real options attempt to take the ideas of financial options and apply them to non-financial options. Many of the ideas of financial options have carried over into the real option method, although opportunities for research on real options still exist. Financial options have been researched thoroughly throughout the past 30 years, especially in the area of risk sensitivity. Risk sensitivity is used in financial options to help investors understand how a change in a variable will affect the value of an option. Risk sensitivity values, known as the “Greeks”, are able to accurately predict the change of an option value, due to a minimal change in a variable. Real options have yet to approach this area of analysis as comprehensively. Generalities have been made to understand how a variable’s change should affect a real option’s value. The analysis in this paper will show that it may not always be appropriate to attempt to use a financial “Greek”-like sensitivity analysis in real options. In many cases, a traditional sensitivity analysis is more appropriate since variable changes affect each real option in unique ways"--Abstract, page iii.

Advisor(s)

Enke, David Lee, 1965-

Committee Member(s)

Spurlock, David
Myers, Donald D., 1939-2009

Department(s)

Engineering Management and Systems Engineering

Degree Name

M.S. in Engineering Management

Publisher

University of Missouri--Rolla

Publication Date

Fall 2005

Pagination

x, 90 pages

Note about bibliography

Includes bibliographical references (pages 87-89).

Rights

© 2005 Pei-Te Chung, All rights reserved.

Document Type

Thesis - Restricted Access

File Type

text

Language

English

Subject Headings

Real options (Finance)

Thesis Number

T 8899

Print OCLC #

71068747

Recommended Citation

Chung, Pei-Te, "Sensitivity analysis of real options parameters" (2005). Masters Theses. 5836.
https://scholarsmine.mst.edu/masters_theses/5836