Real Options. Richard de Neufville Professor of Engineering Systems and of Civil and Environmental Engineering MIT. Outline. Motivational Example: Garage Case General Perspective. Garage Case Topics. Value at Risk Analyzing flexibility using spreadsheet Parking garage case.
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Richard de Neufville
Professor of Engineering Systems and of
Civil and Environmental Engineering
Cut downside ; Expand Upside
1: Examine situation without flexibility
2: Introduce variability (simulation)
3: Introduce flexibility
=> a even different and better design
Demand growth as predicted, no variability
Compare Actual (5 Fl) with unrealistic fixed 6 Fl design
Including Flexibility => Another, better design:
4 Floors with strengthened structure enabling expansion
Why is the optimal design much better when we design with flexibility?
1) Minimize exposure to downside risk
2) Maximize potential for upside gain
An Option is...
Real OptionsReal Options “IN” and “ON” projects