Real Option

University of Gothenburg
School of Business, Economics and Law
Industrial & Financial Management

Case Study 2
Capital Budgeting and Real Options
Block II: Real Options
Applied Real Options Analysis
PART 1: OPTION VALUATION
PART 2: LABORATORY EXPERIMENTS
PART 3: ESSAY QUESTION

Case in Business Administration, 90-120hp
Authors:
EmilAlmefors 860917
Robin Gunnarsson 790901
Patrik Nilsson 870512
Emil Stribrand 880113
Course responsible: Taylan Mavruk
Adm. Course Coordinator: Wiviann Hall

Innehållsförteckning
Part 1: Option valuation 3
Financial option 3
1. Call, Put, and Sensitivity Analysis 3
Real option 6
2. Option to abandon 6
3. Option to expand 7
4. Option to contract 8
5. Option to choose (multiple interacting options) 9
6. Sensitivity analysis 10
Part 2: Laboratory experiments 12
A. Different times to maturity 12
B. Uncertainty and option values 14
C. The Binomial Model v. the Black-Scholes Model (closed-form) 16
D. Dividend/Value leakage and option values 18
E. Sequential compound option 19
4. Estimating volatility 22
Part 3: Essay question 25
Reference 30

Part 1: Option valuation

Financial option
  1. Call, Put, and Sensitivity Analysis

Calculate the price of a six-month European call option on a nondividend-paying stock when the stock price is $42, the strike price is $40, the risk-free interest rate is 10% per year, and the volatility is 20% per year.

a) Use a binomial tree with a time interval of one month.

The call option’s value is ~4,82.

b) Use a B-S Model

When we use the B-S model, the value of the option’s value is ~4,76.

c) Application of the Greek Letters.
Calculate Delta, Gamma, Rho, Theta, Vega, and Xi of the call option in question b.

See the table above for values of the Greek letters.

d) What is the price of a put option with the same variables (using binomial)?... [continues]

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