Loading in 5 sec....

Risk Management & Real Options Wrap-upPowerPoint Presentation

Risk Management & Real Options Wrap-up

- 87 Views
- Updated On :
- Presentation posted in: General

Risk Management & Real Options Wrap-up. Stefan Scholtes Judge Institute of Management University of Cambridge MPhil Course 2004-05 Course website with accompanying material http://www.eng.cam.ac.uk/~ss248/real_options. Introduction The forecast is always wrong

Risk Management & Real Options Wrap-up

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Risk Management & Real OptionsWrap-up

Stefan Scholtes

Judge Institute of Management

University of Cambridge

MPhil Course 2004-05

Course website with accompanying material http://www.eng.cam.ac.uk/~ss248/real_options

Introduction

The forecast is always wrong

The industry valuation standard: Net Present Value

Sensitivity analysis

The system value is a shape

Value profiles and value-at-risk charts

SKILL: Using a shape calculator

CASE:Overbooking at EasyBeds

Developing valuation models

Easybeds revisited

Designing a system means sculpting its value shape

CASE: Designing a Parking Garage I

The flaw of averages: Effects of system constraints

Coping with uncertainty I: Diversification

The central limit theorem

The effect of statistical dependence

Optimising a portfolio

Coping with uncertainty II: The value of information

SKILL:Decision Tree Analysis

CASE: Market Research at E-Phone

Coping with uncertainty III: The value of flexibility

Investors vs. CEOs

CASE: Designing a Parking Garage II

The value of phasing

SKILL: Lattice valuation

Example: Valuing a drug development projects

The flaw of averages: The effect of flexibility

Hedging: Financial options analysis and Black-Scholes

Contract design in the presence of uncertainty

SKILL:Two-party scenario tree analysis

Project: Valuing a co-development contract

Wrap-up and conclusions

© Scholtes 2004

General issue:

- How can we use (simple) models to help us understand uncertainty and the consequences of our decisions in an uncertain world?
General objectives:

- This is a skills-based course. You will learn to use a computer to help you understand and improve system value
- Computational tools based on Excel plus a few add-ins

- But it is also intellectually stretching. I hope to change the way you think about uncertainty in your everyday life

© Scholtes 2004

- Harbour expansion in Sidney
- Designing communications satellites at Motorola
- Terminal 5, 3rd run-way at Heathrow
- Satellite-based toll collection system in Germany
- Sonic cruiser vs 7E7 at Boeing
- Fleet planning at BA
- Bidding for G3 telecom licenses
- Production sharing contract between BP and Petronas, Malaysia
- Drug co-development contract between Cambridge Antibody Technology and Astra Zeneca

© Scholtes 2004

- Understanding the system value
- Improving the system design
- This course focuses on the valuation and design optimisation of systems that operate in an unpredictable dynamic environment
- We will mainly focus on economic valuations ($$) as system values but the general framework applies to non-monetary value measures, too
- E.g. service level

© Scholtes 2004

Big Points

- We lack an intuitive understanding and clear communication of the effects of uncertainty on system value
- We work with forecasts of uncertain variables to generate a single output – the “value” – to re-assure ourselves
- BUT: The forecast is always wrong

© Scholtes 2004

Big points

- Uncertainty is best represented by a SHAPE
- If we want to work with shapes, we need a shape calculator
- SKILL: LEARNED HOW TO USE A SHAPE CALCULATOR

© Scholtes 2004

Big points

- Engineering models focus on “the right answers” - economic valuation of systems must acknowledge that THERE IS NO RIGHT VALUE
- Disheartened response: “Hard” modelling is useless
- My (and hopefully our) response: “Hard” modelling is even more important BUT we have to revise our expectations on modelling
- Good models test and improve our intuition about the value
- Good models help us communicate insight - models are vehicles for story telling
- Work with many valuation models – each of them is part of the “Valuation puzzle”

© Scholtes 2004

- The system value calculated on the basis of average conditions is not the average system value
- Constraints imply that the system value calculated on the basis of average conditions OVERESTIMATES the average system value
- Flexibility implies that the system value calculated on the basis of average conditions UNDERESTIMATES the average system value
- Scenario-based analyses, such as decision trees or Monte Carlo simulation, avoid the flaw

© Scholtes 2004

- Diversification: Don’t put all your eggs in one basket
- Information: Gather information to narrow down the level of uncertain
- Flexibility: Make sure you can act to avoid losses and amplify gains as uncertainties unfold
- Skill: HAVE SEEN SOME SIMPLE MODELLING TEMPLATES THAT ALLOW YOU TO ANALYSE THE EFFECTS OF THESE WEAPONS

© Scholtes 2004

- Contracts are the building blocks of business
- Need to understand the effect of contract terms on risk exposure and opportunity sharing
- Skill: DEVELOPING SIMPLE MODELS FOR CONTRACT VALUATION

© Scholtes 2004

THAT’S IT!

I HOPE YOU HAVE ENJOYED THE COURSE

© Scholtes 2004