scholarly journals Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure

2021 ◽  
Vol 14 (11) ◽  
pp. 530
Author(s):  
Javier G. Castro ◽  
Edison A. Tito ◽  
Luiz E. Brandão
Keyword(s):  
Real Options ◽  
Objective Function ◽  
Main Tool ◽  
Investment Project ◽  
Performance Measure ◽  
Investment Projects ◽  
Modeling Uncertainties ◽  
Optimization Methodology ◽  
High Flexibility ◽  
Omega Measure

Investment decisions usually involve the assessment of more than one financial asset or investment project (real asset). The most appropriate way to analyze the viability of a real asset is not to study it in isolation but as part of a portfolio with correlations between the input variables of the projects. This study proposes an optimization methodology for a portfolio of investment projects with real options based on maximizing the Omega performance measure. The classic portfolio optimization methodology uses the Sharpe ratio as the objective function, which is a function of the mean-variance of the returns of the portfolio distribution. The advantage of using Omega as an objective function is that it takes into account all moments of the portfolio’s distribution of returns or net present values (NPVs), not restricting the analysis to its mean and variance. We present an example to illustrate the proposed methodology, using the Monte Carlo simulation as the main tool due to its high flexibility in modeling uncertainties. The results show that the best risk-return ratio is obtained by optimizing the Omega measure.

One Method to Identify the Real Options in the Investment Project

2019 ◽  
Vol 8 (3) ◽  
pp. 35-44
Author(s):  
Inas Nadrus ◽  
Valery Anshin ◽  
Igor Demkin
Keyword(s):  
Real Options ◽  
Present Article ◽  
Oil And Gas ◽  
Investment Project ◽  
Oil And Gas Industry ◽  
Specific Nature ◽  
Gas Industry ◽  
Investment Projects ◽  
Multiple Case ◽  
Multiple Case Studies

The present article describes a research that examines the sources of flexibility in the investment projects in the oil and gas industry using multiple case studies of several oil and gas projects. More precisely, the study is concerned with revealing uncertainties that give rise to real options. Ultimately, the methodology for real options identification in the exploration & development type of investment projects of the oil and gas industry is proposed. It is anticipated that the results might help to bring certain improvements into the existing managerial conception of using real options for investment project evaluation considering the specific nature of investment projects in the oil and gas industry.

Real Options Framework for Dealing with Uncertainty in Project Management: A Moroccan Infrastructure Project

2019 ◽  
Vol 01 (01) ◽  
Author(s):  
Jihane Gharib ◽  
Abdelaziz Berrado ◽  
Loubna Benabbou
Keyword(s):  
Real Options ◽  
Investment Project ◽  
Future Market ◽  
Decision Analysis Model ◽  
Business Managers ◽  
Analysis Model ◽  
The Real ◽  
Investment Projects ◽  
Real Options Valuation ◽  
Infrastructure Project

The Real Options Valuation allows for the consideration of possible options that are instinctively embedded in investment projects, in which the decision-makers have the flexibility to respond to the outcome of uncertainty. The business managers’ abilities to react to future market conditions tend to impact the value of the investment project by maintaining or improving the upside potential and limiting the downside loss. This process must be regulated by a decision analysis model, capable of capturing the particularities of each project. This paper presents detailed literature review of the real options, includes their area of applications in the literature, then proposes a framework to ease the understanding and the use of this method. Later, a case study of a Moroccan infrastructure project, that had already undergone an evaluation, is outlaid. The paper fully addresses the gaps of the previous study, provides a corrected model for an improved valuation of this project and a suitable use of real options. It also illustrates its application and analyzes the obtained results.

scholarly journals Investments in Pinus elliottii Engelm. Plantations: Real Options Analysis in Discrete Time

Forests ◽  
2022 ◽  
Vol 13 (1) ◽  
pp. 111
Author(s):  
Jorge Carvalho Martins ◽  
Richardson Barbosa Gomes da Silva ◽  
Rafaele Almeida Munis ◽  
Danilo Simões
Keyword(s):  
Real Options ◽  
Investment Project ◽  
Planning Horizon ◽  
Pinus Elliottii ◽  
Plantation Forest ◽  
Financial Evaluation ◽  
Real Options Analysis ◽  
The Real ◽  
Investment Projects ◽  
Pinus Spp

Background: The commonly used methods for the financial evaluation of plantation forest investment projects do not incorporate uncertainties and ignore the value related to flexibility. The real options analysis makes it possible to capture these values in investment projects, increasing their value and return. Despite this, studies involving real options in forest investment projects are scarce, specifically those related to Pinus spp. Therefore, this study aimed to: (a) analyze whether the real options analysis adds value to investment projects of Pinus elliottii Engelm. plantations; and (b) make the real options analysis more accessible to forest managers and potentially increase its use in the investment projects of Pinus spp. plantations. Methods: We evaluated two investment projects in P. elliottii plantations in southern Brazil, which differed in the way of obtaining the land for planting: with lease or purchase of land on a planning horizon of 21 years. In the real options analysis, we used deferral, expansion, and abandonment. Results: Individually, the deferral, expansion, and abandonment options add value to investment projects in Pinus elliottii plantations. The option to expand the forested area is one that adds the most value to the investment project with land lease. In the investment project with land purchase, it is abandonment. Conclusions: Investment projects in Pinus elliotti plantations that contemplate the land purchase analyzed through the real options analysis present higher financial returns than those that consider land lease, inverting the result provided by the traditional analysis.

Real Options Models for Maintenance Decision Making for Offshore Jacket Platforms

2005 ◽  
Author(s):  
Sandra Santa-Cruz ◽  
Ernesto Heredia-Zavoni
Keyword(s):  
Decision Making ◽  
Real Options ◽  
Structural Reliability ◽  
Net Present Value ◽  
Investment Project ◽  
Cash Flows ◽  
Point Of View ◽  
Investment Projects ◽  
Financial Variables ◽  
Financial Options

Real options models are currently available as one of the best tools for the assessment of investment projects. This is so mainly due to the capability of the real options models to: (1) account for uncertainties in financial variables that are crucial to the investment project; and (2) quantify the value of the possibility to make a decision on whether to defer, abandon, expand or reduce the project at one or several points along time. Recently, some researchers have proposed the use of real options models for the assessment of infrastructure projects for hydrocarbon exploitation from an economics point of view. The objective of this work is to develop real options models for decision making regarding inspection, maintenance and decommissioning of offshore facilities taking into account the financial and technical aspects of the project. In all cases it is considered that at some point in the future, within the service lifetime of the structure, the decision maker will have an option to carry or not an inspection, and take or not a maintenance or decommissioning action, which will determine the structural and financial performance of the project for its remaining lifetime. The in-service times with no structural failure and the rehabilitation times are modeled as random variables. The cash flows are modeled as stochastic processes considering interruption of operation due to repairs after failure. Analytical expressions are derived for the computation of structural reliability and availability depending upon maintenance actions. An example is given for a jacket platform subjected to fatigue deterioration and damage. Simple and compound options of maintenance and decommissioning options are analyzed. The value of the project is computed by means of an approach similar to that of Black and Scholes for financial options [2]. The results are compared to those obtained under the traditional Net Present Value approach.

An Estimation of Profitability of Investment Projects in The Oil and Gas Industry Using Real Options Theory / Ocena Opłacalności Projektów Inwestycyjnych W Przemyśle Naftowym Z Wykorzystaniem Teorii Opcji Realnych

2012 ◽  
Vol 57 (2) ◽  
pp. 391-401 ◽  
Author(s):  
Piotr Kosowski ◽  
Jerzy Stopa
Keyword(s):  
Real Options ◽  
Oil And Gas ◽  
Petroleum Industry ◽  
Investment Project ◽  
Oil And Gas Industry ◽  
Gas Industry ◽  
Real Options Theory ◽  
Investment Projects ◽  
New Information ◽  
Options Theory

Abstract Paper discusses issues relating to the valuation of investment efficiency in the oil and gas industry using a real options theory. The example of investment pricing using real options was depicted and it was confronted with the analysis executed with the use of traditional methods. Indicators commonly used to evaluate profitability of investment projects, based on a discounted cash flow method, have a few significant drawbacks, the most meaningful of which is staticity which means that any changes resulting from a decision process during the time of investment cannot be taken into consideration. In accordance with a methodology that is currently used, investment projects are analysed in a way that all the key decisions are made at the beginning and are irreversible. This approach assumes, that all the cash flows are specified and does not let the fact that during the time of investment there may appear new information, which could change its original form. What is also not analysed is the possibility of readjustment, due to staff managment’s decisions, to the current market conditions, by expanding, speeding up/slowing down, abandoning or changing an outline of the undertaking. In result, traditional methods of investment projects valuation may lead to taking wrong decisions, e.g. giving up an owned exploitation licence or untimely liquidation of boreholes, which seem to be unprofitable. Due to all the above-mentioned there appears the necessity of finding some other methods which would let one make real and adequate estimations about investments in a petroleum industry especially when it comes to unconventional resources extraction. One of the methods which has been recently getting more and more approval in a world petroleum economics, is a real options pricing method. A real option is a right (but not an obligation) to make a decision connected with an investment in a specified time or time interval. According to the method a static model of pricing using DCF is no longer used; an investment project is divided into a series of steps and after each one there is a range of possible investment decisions, technical and organizational issues and all the others called ‘real options’. This lets one take many different varieties of modyfiying a strategy while pricing the project. This also makes it possible to react to the changing inner and outer situation and introducing new information while accomplishing the investment project. Owing to those, the decision process is a continuous operation, what is an actual vision of a real investment project management in the petroleum industry.

Project portfolio valuation using real options

2020 ◽  
Vol 13 (2) ◽  
pp. 126-146
Author(s):  
A.B. Lanchakov ◽  
S.A. Filin ◽  
A.Zh. Yakushev
Keyword(s):  
Real Options ◽  
Real Option ◽  
Project Portfolio ◽  
Risk And Uncertainty ◽  
Expected Effect ◽  
Investment Projects ◽  
Financial Options ◽  
Portfolio Efficiency ◽  
The Face ◽  
Effective Development

Subject. The article analyzes the expected effect of a portfolio of projects in the face of risk and uncertainty, when using real options. Objectives. The purpose is to offer a more objective formula to assess the expected impact of a portfolio of projects for real investment objects under risk and uncertainty, using real options, and provide recommendations for improving the portfolio efficiency. Methods. The study draws on methods of real options and evaluation of investment projects through the real option value, the cash flow discounting method, synthesis, and mathematical modeling. Results. We systematized the main types of real options and developed a formula for calculating the expected effect of project portfolio implementation. The said formula shows that considering the additional long-term costs embedded in a portfolio of real options, which are associated with the use of these real options, and, therefore, reducing the overall risk of projects and the entire portfolio, permit to improve the objectivity of such calculations. Conclusions. When analyzing real options that have real assets as underlying instruments, it is often impossible to apply the computational formulae for financial options, as they differ significantly. The systematization of the main types of real options helps expand the range of application of management solutions. The offered formula enables to improve the efficiency of project insurance under risk and uncertainty and to use additional opportunities for effective development of the company.

Improving the financial investment system as an object of business economics

2020 ◽  
Vol 26 (3) ◽  
pp. 508-526
Author(s):  
O.T. Astanakulov ◽  
E.G. Sheina
Keyword(s):  
Deductive Reasoning ◽  
Methodological Approach ◽  
Investment Project ◽  
Assessment Method ◽  
Expert Assessment ◽  
Business Economics ◽  
Financial Investment ◽  
Economic Relations ◽  
Investment Projects ◽  
Investment Control

Subject. This article explores the economic relations of economic entities concerning effective investment activities, combining elements of investment control and assessment of related risk. Objectives. The article aims to analyze and logically substantiate the stages and types of investment activities of enterprises and investment projects in-progress, as well as define a methodological approach to assessing project risks. Methods. For the study, we used a structural and logical analysis, and deductive reasoning. The methodological base of the study is based on the principles of the theory of finance, investment and risk management. Results. The article defines stages of assessing the financial condition of enterprises and proposes a methodological approach to assessing certain risks of an investment project based on the risk ranking by degree of probability and significance of an event through applying the expert assessment method. The article also presents a practice-oriented risk map for investment projects and clarifies the concept of Investment Control. Conclusions. The results of the study can help address the significant for the Russian economy issue of stimulating and developing investment activities at enterprises, as well as implementing and evaluating the effectiveness of investment projects at the micro-and macro-levels of the country's economy.

Real options in business valuation and investment

2018 ◽  
Author(s):  
Андрей Гусев ◽  
Andrey Gusev
Keyword(s):  
Graduate Students ◽  
Real Options ◽  
Scientific Publication ◽  
Investment Analysis ◽  
Investment Activity ◽  
Business Valuation ◽  
Investment Projects ◽  
University Teachers ◽  
Specific Calculations

In the presented monograph discusses the major problems associated with the development of methods of investment analysis and application of real options method in the assessment of efficiency of investment projects and valuation of enterprise (business). Disclosed the content of the basic models of evaluation of real options, a classification of real options, the theoretical principles supported by specific calculations. Scientific publication intended for graduate students, University teachers, scientific employees, specializing in the field of management of investment activity of enterprises and business valuation.

USING REAL OPTIONS IN AN INVESTMENT VALUATION AND DECISION-MAKING PROCESSES

2020 ◽  
Vol 1 (8) ◽  
pp. 43-46
Author(s):  
T. T. ADAMIYA ◽  
Keyword(s):  
Decision Making ◽  
Real Options ◽  
Financial Management ◽  
Significant Risk ◽  
Investment Project ◽  
Market Uncertainty ◽  
Investment Activity ◽  
Traditional Assessment ◽  
Decision Making Processes ◽  
Additional Value

The current stage of global development is characterized by opportunities for investment activity, along with an instability of the economic situation and high uncertainty, dictates the need for investors and managers to make effective decisions, taking into account constantly changing conditions. An investor, while making a decision which project to accept, for the most part, uses the standard methods of financial management as a basis for forecasting and analysis. Considering fast-moving processes of technology change, as well as the conditions of market uncertainty, significant risk and agency problems, the article proposes the use of real options as an insurance (hedging) tool for investors against risks at different stages of the investment project. Risk management can be carried out through real options - the tool of flexibility in decision making. Traditional assessment methods ignore the ability to adapt internal and external changes, however management flexibility can significantly reduce risks, and therefore create additional value.

نماذج المحاكاة- محاكاة مونتي كارلو- كأسلوب كمي من أساليب النمذجة واتخاذ القرارات - مقاربة نظرية وتطبيقية

2021 ◽  
Vol 1 (1) ◽  
Author(s):  
محمد الأمين ◽  
بن حامد عبد الغني ◽  
مراس محمد
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Quantitative Methods ◽  
Practical Importance ◽  
Investment Project ◽  
Simulation Method ◽  
Period Analysis ◽  
Investment Projects ◽  
Monte Carlo Simulation Model

Our research aims to try to present the modeling mechanisms in the field of simulation and quantitative methods. The research is a presentation of the role of quantitative methods in making investment project evaluation decisions, more than that and is the use of the Monte Carlo simulation model in evaluation and multi-period analysis of investment projects under conditions Risk and uncertainty. And highlighting the theoretical, scientific and practical importance of the Monte Carlo simulation method in particular, and the importance of using quantitative methods in helping to make decisions in general

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