: Yuanyun Kang
: Real Option Valuation of Product Innovation
: Diplomica Verlag GmbH
: 9783836627412
: 1
: CHF 46.90
:
: Management
: English
: 85
: kein Kopierschutz/DRM
: PC/MAC/eReader/Tablet
: PDF
How can you evaluate a potential investment if there are several possibilities to change the course of action in the future depending on different emerging situations? And even more challenging: How can you do so if you cannot come up with point estimates - but you have to use several ranges of input values? Both - managerial flexibility as well as so called continuous uncertainty - are highly relevant as they reflect most of the investment decisions realistically. But if you apply standard valuation techniques like a simple Discounted Cash Flow model, the computed value will be significantly distorted, potentially prompting you to make a wrong decision.

Given the practical urgent need for a suitable valuation technique, the real option valuation approach was developed as an advanced valuation approach. It follows a non-trivial but doable four-step process, quantifying the value of investments in situations of managerial flexibility and continuous uncertainty. While real option valuation is considered to be an opaque technique, Ms. Kang proves that it can be explained in an understandable way, even for someone approaching the matter with limited or no prior exposure to the topic.

The author outlines the major issues of current product innovation valuation with traditional valuation techniques. On the basis of this analysis she explains the basic concepts of valuing product innovation through the use of real option valuation. Supported by a few practical examples the author clarifies how to value different types of real options. So based on the actual Financial Statement 2006 of Research In Motion (RIM), the author develops a sample 5-year business plan for the product innovation of BlackBerry 9900. This is done through the highly advanced model of Binomial Trees. Overall with this thesis, you`ll get a head-start into one of the more advanced management tools - the real option valuation.
Chapter 3, Introduction of Real Option Valuation

The Definition of an option

Option is a definition in capital budgeting. An option provides the buyer (holder) the right (but not the obligation) to exercise by buying or selling an asset at a set price (called an exercise price or a strike price) on (European style option) or before (American style option) a future date (the expiration date). An option is often classified as call option and put option.

Exercise price is the amount of money invested to exercise the option if you are ‘buying’ the asset with a call option, or the amount of money received if you are ‘selling” it with a put option.

Underlying asset for a financial option is a security such as a share of common stock or a bond. For example, in a stock option to buy 100 shares of BlackBerry at EUR 140 at the end of year 2007, the BlackBerry share is the underlying asset. In a futures contract to buy EUR 10 million 10 year German Government Bonds, the underlying assets are the German Government bonds.

Underlying risk is that you may lose the money you invested – your capital. It is a measure of the variance of possible outcomes. A risk is related to the expected losses which can be caused by a risky event and to the probability of this event. A financial risk is often presented as the unexpected variability or volatility of returns, and thus includes both potential worse than expected as well as better than expected returns.

A Call option gives the buyer the right to buy the underlying asset at an exercise price, at any time prior to the expiration date. At expiration date, the option is not exercised and expires worthless if the value of the underlying asset is less than the exercise price. If the value of the asset is greater than the exercise price, the option is exercised – the buyer of the option buys the stock at the exercise price. Figure 3.1 illustrates the cash payoff on a call option at expiration. The net payoff is negative (and equal to the price paid for the call) if the price of the underlying asset is less than the exercise price. If the price of the underlying asset exceeds the exercise price, the difference between the price of the underlying asset and the exercise price comprises the gross profit on the investment. The net profit on the investment is the difference between the gross profit and the price paid for the call initially.

A put option gives the buyer the right to sell the underlying asset at exercise price, at any time prior to the expiration date of the option. At expiration date, if the price of the underlying asset is greater than the exercise price, the option will not be exercised and will expire worthless. If the price of the underlying asset is less than the exercise price, the buyer will exercise the option and sell the stock at the exercise price. As shown in figure 3.2, a put option has a negative net payoff if the price of the underlying asset exceeds the exercise price. If the value of the underlying asset is less than the exercise price, a gross payoff equals to the difference between the exercise price and the price of the underlying asset.
Content3
Abstract5
1. Introduction7
1.1. The Problem on the Valuing Product Innovation7
1.2. Goal of the Thesis9
1.3. Methodology10
2. Basic Concepts of Valuation on Product Innovation13
2.1. Definition and Character of Product Innovation13
2.1.1. Definition of Product Innovation14
2.1.2. Character of Product Innovation15
2.2. Main Challenges in Valuing Product Innovation19
2.3. Selection of the Adequate Methodology21
2.3.1. Net Present Value21
2.3.2. Other traditional approaches23
3. Introduction of Real Option Valuation26
3.1. The Definition of an option26
3.2. Difference between Real Options and Financial Options28
3.3. Value Drivers of Real Options29
3.3.1. Value Drivers relating to the underlying asset and financial market29
3.3.2. Uncertainty31
3.3.3. Managerial Flexibility33
3.4. Typology of Real Options35
3.4.1. The Option to Delay37
3.4.2. The Option to Abandon39
3.4.3. The Option to Expand40
3.4.4. The Option to Contract42
3.4.5. The Option to Switching44
3.4.6. Compound Option46
3.5. Methodology of Real Option Valuation49
3.5.1. Black-Scholes Model50
3.5.2. Binomial Tree Model51
3.5.3. Selection of the adequate methodology55
4. Applying Real Option Valuation to the illustration BlackBerry56
4.1. Introduction of the Product Innovation BlackBerry57
4.2. Valuing Process of the chosen example58
4.2.1. First Step: Valuing without Flexibility . Traditional DCF Method60
4.2.2. Second Step: Model the Uncertainty ---- Using Event Tree63
4.2.3. Third Step: Identity and Incorporate Managerial Flexibility65
4.2.4. Fourth Step: Conduct Real Options Analysis69
5. Conclusion74
5.1. Thesis Summary74
5.2. Limitation of Real Option Valuation75
5.3. Possible Complementation of Real Option Valuation77
5.3.1. Combining ROV and DCF77
5.3.2. Other Possible Complementation79
6. Appendix81
Autorenprofil84