E-Book Overview
This book analyzes real options valuation for non-constant versus constant interest rates using simulation and historical backtesting. Several real options are investigated and combined with various pricing tools and stochastic term structure models. Interest rates for real options valuation are simulated by using stochastic term structure models (Vasicek, Cox-Ingersoll-Ross, Ho-Lee, and Hull-White one-factor and two-factor models) and by using implied forward rates. The book shows that the assumption of a constant interest rate in real options valuation is not justifiable. All necessary theory is provided in the book. The analyses were conducted using a proprietary computer simulation program. All results are explained in detail and rules are derived for application in Corporate Finance practice. For the first time, a systematic analysis based on simulations and historical backtesting compares real options valuation using constant interest rates and the implied forward rates with methods that simulate interest rates stochastically.
E-Book Content
Lecture Notes in Economics and Mathematical Systems Founding Editors: M. Beckmann H. P. Kunzi Managing Editors: Prof. Dr. G. Fandel FachbereichWirtschaftswissenschaften Femuniversitat Hagen Feithstr. 140/AVZII, 58084 Hagen, Germany Prof. Dr. W. Trockel Institut fur Mathematische Wirtschaftsforschung (IMW) Universitat Bielefeld Universitatsstr. 25, 33615 Bielefeld, Germany Editorial Board: A. Basile, A. Drexl, H. Dawid, K. Inderfurth, W. Kursten, U. Schittko
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Marcus Schulmerich
Real Options Valuation The Importance of Interest Rate Modelling in Theory and Practice
Springer
Author Dr. Marcus Schulmerich, CFA, FRM Vice President Allianz Global Investors Group Nymphenburger Strasse 112-116 80636 Munich/Germany marcus. schulmerich® alum.mit.edu
Library of Congress Control Number: 2005928811
ISSN 0075-8442 ISBN-10 3-540-26191-5 Springer Berlin Heidelberg New York ISBN-13 978-3-540-26191-9 Springer Berlin Heidelberg New York This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, re-use of illustrations, recitation, broadcasting, reproduction on microfilms or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9,1965, in its current version, and permission for use must always be obtained from Springer-Verlag. Violations are liable for prosecution under the German Copyright Law. Springer is a part of Springer Science+Business Media springeronline.com © Springer-Verlag Berlin Heidelberg 2005 Printed in Germany The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Typesetting: Camera ready by author Cover design: Erich Kirchner, Heidelberg Printed on acid-free paper
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Foreword
Managerial decision-making during the lifetime of a project can have important implications on project handling and its contribution to shareholder value. Traditional capital budgeting methods (in particular methods based on net present value) fail to capture the role of managerial degrees of freedom and therefore tend to lead to a systematic undervaluation of the project. In contrast, the real options approach to investment analysis characterizes decision-making flexibility in terms of (real) option rights which can be evaluated analogously to financial options using contingent-claims pricing techniques widely used in capital markets. The rese