Advertisement

Real Options Valuation

The Importance of Interest Rate Modelling in Theory and Practice

  • Marcus Schulmerich

Part of the Lecture Notes in Economics and Mathematical Systems book series (LNE, volume 559)

Table of contents

About this book

Introduction

Managerial decision-making during the lifetime of a project can have im­ portant 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 free­ dom 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 eval­ uated analogously to financial options using contingent-claims pricing tech­ niques widely used in capital markets. The research carried out by Marcus Schulmerich analyzes real options for n- constant and stochastic interest rates versus constant interest rates. Analyzing stochastic interest rates in the context of real options valuation is of particular relevance given their long time to maturity which makes them more vulnera­ ble to interest rate risk than short-term financial options. To date, there has not been a comprehensive review of this issue in the academic literature. The fact that interest rates have fiuctuated widely over the recent years further highlights the need for studying this issue.

Keywords

Corporate Finance Finance Implied Forward Rates Monte Carlo Simulation Options Real Options Stochastic Interest Rate Models Stochastic model Stochastic models Valuation calculus modeling

Authors and affiliations

  • Marcus Schulmerich
    • 1
  1. 1.Allianz Global Investors GroupMunichGermany

Bibliographic information

  • DOI https://doi.org/10.1007/3-540-28512-1
  • Copyright Information Springer-Verlag Berlin Heidelberg 2005
  • Publisher Name Springer, Berlin, Heidelberg
  • eBook Packages Business and Economics
  • Print ISBN 978-3-540-26191-9
  • Online ISBN 978-3-540-28512-0
  • Series Print ISSN 0075-8442
  • Buy this book on publisher's site