Barking up the right tree: binomial option valuation of investments in steel making : a case study of Metals and Polymers (Ukraine)
This paper investigates the impact of real options on the value of a particular business entity. Theoretically, the paper benefits from use of an option pricing model which is based on a two-state (binomial) framework. This model provides an intuitive appeal by visually showing the evolution of t...
| Main Author: | |
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| Format: | H2 |
| Language: | Inglés |
| Published: |
SLU/Dept. of Economics
2012
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| Subjects: |
| _version_ | 1855570678211674112 |
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| author | Serebrennikov, Dmytro |
| author_browse | Serebrennikov, Dmytro |
| author_facet | Serebrennikov, Dmytro |
| author_sort | Serebrennikov, Dmytro |
| collection | Epsilon Archive for Student Projects |
| description | This paper investigates the impact of real options on the value of a particular business
entity. Theoretically, the paper benefits from use of an option pricing model which is
based on a two-state (binomial) framework. This model provides an intuitive appeal
by visually showing the evolution of the value of a business in terms of discrete time
intervals. In contrast to majority of similar studies, this paper utilizes an extended
version of the binomial framework that combines both volatility and drift (in actual
expression, it is substituted by risk-free rate).
Empirically, the analysis is supported by financial data from Ukrainian steel-making
company Metals and Polymers Ltd. Properties of production process, as well as
institutional environment, enable to detect two business opportunities examined by
means of the theoretical model selected. These opportunities are option to expand and
option to abandon. The potential of the company in terms of profitability is estimated
using conventional NPV analysis, with no options included. This estimation is then
enhanced by implementing the options chosen.
To account for different economic scenarios, some independent variables are taken
fixed while others are loosen to float in the imposed intervals. Among the variables,
changeable (floating) ones are rate of corporate tax, rate of volatility and discount rate.
It is shown that in the presence of options the value of the company is significantly
higher than without them. Moreover, its value is subject to noticeable fluctuations
depending on alterations in the changeable variables. |
| format | H2 |
| id | RepoSLU4406 |
| institution | Swedish University of Agricultural Sciences |
| language | Inglés |
| publishDate | 2012 |
| publishDateSort | 2012 |
| publisher | SLU/Dept. of Economics |
| publisherStr | SLU/Dept. of Economics |
| record_format | eprints |
| spelling | RepoSLU44062012-06-28T14:16:58Z Barking up the right tree: binomial option valuation of investments in steel making : a case study of Metals and Polymers (Ukraine) Serebrennikov, Dmytro binomial lattice real options steel production time series analysis This paper investigates the impact of real options on the value of a particular business entity. Theoretically, the paper benefits from use of an option pricing model which is based on a two-state (binomial) framework. This model provides an intuitive appeal by visually showing the evolution of the value of a business in terms of discrete time intervals. In contrast to majority of similar studies, this paper utilizes an extended version of the binomial framework that combines both volatility and drift (in actual expression, it is substituted by risk-free rate). Empirically, the analysis is supported by financial data from Ukrainian steel-making company Metals and Polymers Ltd. Properties of production process, as well as institutional environment, enable to detect two business opportunities examined by means of the theoretical model selected. These opportunities are option to expand and option to abandon. The potential of the company in terms of profitability is estimated using conventional NPV analysis, with no options included. This estimation is then enhanced by implementing the options chosen. To account for different economic scenarios, some independent variables are taken fixed while others are loosen to float in the imposed intervals. Among the variables, changeable (floating) ones are rate of corporate tax, rate of volatility and discount rate. It is shown that in the presence of options the value of the company is significantly higher than without them. Moreover, its value is subject to noticeable fluctuations depending on alterations in the changeable variables. SLU/Dept. of Economics 2012 H2 eng https://stud.epsilon.slu.se/4406/ |
| spellingShingle | binomial lattice real options steel production time series analysis Serebrennikov, Dmytro Barking up the right tree: binomial option valuation of investments in steel making : a case study of Metals and Polymers (Ukraine) |
| title | Barking up the right tree: binomial option valuation of investments in steel making : a case study of Metals and Polymers (Ukraine) |
| title_full | Barking up the right tree: binomial option valuation of investments in steel making : a case study of Metals and Polymers (Ukraine) |
| title_fullStr | Barking up the right tree: binomial option valuation of investments in steel making : a case study of Metals and Polymers (Ukraine) |
| title_full_unstemmed | Barking up the right tree: binomial option valuation of investments in steel making : a case study of Metals and Polymers (Ukraine) |
| title_short | Barking up the right tree: binomial option valuation of investments in steel making : a case study of Metals and Polymers (Ukraine) |
| title_sort | barking up the right tree: binomial option valuation of investments in steel making : a case study of metals and polymers (ukraine) |
| topic | binomial lattice real options steel production time series analysis |