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Waiting in real options with applications to real estate development valuation
KTH, School of Architecture and the Built Environment (ABE), Centres, Centre for Banking and Finance, Cefin.ORCID iD: 0000-0003-4454-474X
2016 (English)Licentiate thesis, comprehensive summary (Other academic)
Abstract [en]

In this thesis two dierent problems regarding real options are studied. The rst paper discusses the valuation of a timing option in an irreversible investment when the underlying model is incomplete. It is well known that in a complete model there is no nite optimal time at which to invest if the underlying asset, in our case the value of the developed project, does not pay out any strictly positive cash ows. In an incomplete model, the situation is dierent. Depending on the market price of risk in the model, there could be an optimal nite investment time even though the underlying asset does not pay out any strictly positive cash ows. Several examples of incomplete models are analyzed, and the value of the investment opportunity is calculated in each of them. The second paper concerns the valuation of random start American perpetual options. This type of perpetuate American option has the feature that it can not be exercised until a random time has occured. The reason for studying this type of option is that it provides a way of modelling the initiating of a project, e.g. the optimal time to build on a piece of land, which can not occur until a permit, or some other form of clearance, is given. The random time in the project application represents the time at which the permit is given. Two concrete examples of how to calculate the value of random start options is given.

Place, publisher, year, edition, pages
Stockholm: KTH Royal Institute of Technology, 2016. , 12 p.
Series
TRITA-KTH-CEFIN-SR, ISSN 1653-7335 ; 03
Keyword [en]
Real options, Incomplete markets
National Category
Economics and Business
Research subject
Real Estate and Construction Management
Identifiers
URN: urn:nbn:se:kth:diva-188145ISBN: 978-91-87111-06-8 (print)OAI: oai:DiVA.org:kth-188145DiVA: diva2:933616
Presentation
2016-06-15, Rum 2166, Brinellvägen 1, KTH-Campus, Stockholm, 15:00 (English)
Opponent
Supervisors
Note

QC 20160607

Available from: 2016-06-07 Created: 2016-06-07 Last updated: 2016-07-08Bibliographically approved
List of papers
1. On the use of implied yields in real option modelling
Open this publication in new window or tab >>On the use of implied yields in real option modelling
(English)Manuscript (preprint) (Other academic)
Abstract [en]

In many applications of real options there is an assumption of complete capital markets. For the perpetual optimal timing option this means that if the underlying asset (e.g. a developed project) does not pay out any cash flows, then there is no finite optimal time at which the investment should be undertaken. In contrast, when the markets are incomplete, there could be a possibility of a finite optimal stopping time. We discuss the incomplete case in detail, connect it with yields and “implied yields” and give several examples of incomplete market models where could be a finite optimal time to invest.

Keyword
Real options, Incomplete markets, Irreversible investments
National Category
Economics and Business
Identifiers
urn:nbn:se:kth:diva-188140 (URN)
External cooperation:
Note

QC 20160607

Available from: 2016-06-07 Created: 2016-06-07 Last updated: 2016-09-02Bibliographically approved
2. Random start American perpetual options
Open this publication in new window or tab >>Random start American perpetual options
(English)Manuscript (preprint) (Other academic)
Abstract [en]

The valuation of American perpetual options with the property that they are only possible to exercise after a random time has occured are considered. One situation where this feature is present is when we want to value the real option of when to build on vacant land and we are waiting for a permit. This and a version of an abandonment option are our two applications of this model.

Keyword
Real options, American options, Perpetual options
National Category
Economics and Business
Identifiers
urn:nbn:se:kth:diva-188141 (URN)
External cooperation:
Note

QC 20160607

Available from: 2016-06-07 Created: 2016-06-07 Last updated: 2016-09-02Bibliographically approved

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Armerin, Fredrik

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Citation style
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  • de-DE
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  • en-US
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  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
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  • text
  • asciidoc
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