Portfolios of real options (Q932091)

The book provides a rigorous valuation framework for portfolios of real options, that is of corporate investment decisions having a real asset as underlying asset. The author develops a modeling approach for dynamic investment problems, where limited resources are allocated to interacting risky projects over time, subject to constraints. The model is set up as a multi-dimensional real options analysis problem based on \(n\) underlying assets and their joint behaviour. The modeling of the underlying assets is flexible and allows for changes in the characteristics of these assets. The work is structured on 6 chapters. The first chapter is an introductory chapter, in which the main results and contributions and the questions to be answered in the following chapters are highlighted. Chapter 2 motivates the portfolio perspective on real options. The concepts of real option and portfolio of real options are introduced here, emphasizing similarities and differences with the related financial concepts. The third chapter contains a literature review of the relevant strands which cover financial portfolio theory, corporate capital budgeting and financial and real options theory. The main contribution of this work is presented in Chapter 4. This chapter contains the development of the general model formulation. Firstly, a discussion on the key model features that are to be included is made. The model is built up successively, using a binomial option pricing model with one underlying asset, then expanded to a multinomial option pricing model with two underlying assets, which is finally generalized to \(n\) underlying assets. The chapter concludes with a discussion on the model features and possible extensions. Chapter 5 is dedicated to the numerical analysis of the model, studying the effects that constraints, volatility, correlation and starting values might have on the portfolio. Some illustrative examples are also presented here. In the final chapter, the main results are summarized and an outlook on further work is given.