Know when to fold ‘em: An empirical description of risk management in public research funding
بدانید چه موقع برابر شوید: شرح تجربی مدیریت ریسک در بودجه تحقیق عمومی-2020
Public research funding programs typically make grants with minimal intervention by program staff, rather than using a hands-on approach to project management, which is more common in the private sector. In contrast, program staff at the US Department of Energys Advanced Research Projects Agency – Energy (ARPA-E) are given a set of real options with which to manage funded projects: abandon, contract or expand project budgets or timelines. Using internal data from ARPA-E, we show that active project management enables risk mitigation across a portfolio of research projects. We find that program staff modify projects frequently, especially project timelines, and these changes are more sensitive to poor performance than to strong performance. We also find that projects with a shortened timeline or reduced budget are less likely to generate short-term research outputs, compared to those of ultimately similar size. This evidence suggests that the practice of active project management, when combined with high upfront risk tolerance, can be used to enhance the productivity of missionoriented public research funding.
Keywords: R&D funding | Project management | Real options | Managerial flexibility
Investment in carbon dioxide capture and storage combined with enhanced water recovery
سرمایه گذاری در جذب و ذخیره دی اکسید کربن همراه با بهبود بازیافت آب-2020
Carbon dioxide capture and storage combined with enhanced deep saline water recovery (CCS-EWR) is a potential approach to mitigate climate change. However, its investment has been a dilemma due to high costs and various uncertainties. In this study, a trinomial tree modelling-based real options approach is constructed to assess the investment in CCS-EWR retrofitting for direct coal liquefaction in China from the investor perspective. In this approach, the uncertainties in CO2 prices, capital subsidies, water resource fees, the residual lifetime of direct coal liquefaction plants, electricity prices, CO2 and freshwater transport distance, and the amount of certified emission reductions (CERs) are considered. The results show that the critical CER price for CCS-EWR retrofits is 7.15 Chinese yuan per ton (CNY/ton) higher than that (141.95 CNY/ton) for CCS retrofits. However, the exemption from water resource fees for freshwater recovered from saline water and a subsidy of 26% of the capital cost are sufficient to eliminate the negative impact of enhanced deep saline water recovery (EWR) on the investment economy of CCS-EWR. In addition, when the residual lifetime is less than 14 years, CCS-EWR projects are still unable to achieve profitability, even with flexible management and decision making; therefore, investors should abandon CCS-EWR investments. On the whole, the investment feasibility for CCS-EWR technology is not optimistic despite access to preferential policies from the government. It is necessary to establish a carbon market with a high and stable CER price.
Keywords: Direct coal liquefaction | CCS | Uncertainties | Real options approach | Investment
Capacity investment under uncertainty: The effect of volume flexibility
سرمایه گذاری روی ظرفیت تحت عدم قطعیت: تاثیر انعطاف پذیری حجم-2018
Real option theory is a central tool in todays investment theory as it integrates uncertainty and managerial flexibility in the analysis and valuation of investment projects. This paper studies the optimal time and size of investment for a monopolistic firm under demand uncertainty and volume flexibility. In our modeling framework, demand is random and the firm first decides the optimal time and size of the production process. After entry, the firm adjusts continuously production volume to match the observed demand. Volume flexibility comes at a cost which depends on both the current output and the established capacity. We study two different models of volume flexibility: Downside volume flexibility allows the firms to produce any quantity below the installed capacity; Upside volume flexibility allows to expand production above the firms capacity size. In both cases, the option to temporary suspend production is not given a priori, but it is part of the firms optimal choice. With this feature, the model provides conclusions that contrast some of the most recent theoretical findings on the same subject. We find that an increase of the degree of downside volume flexibility makes the firm willing to invest earlier in a larger plant. We also show that downside volume flexibility reduces the utilization rates, especially in highly uncertain markets. Upside volume flexibility has the joint effect of reducing the size of the investment and the investment threshold at which the firm installs capacity. The utilization rates are significantly higher compared to the case of downside volume flexibility only, and there is an increasing relationship between increased upside flexibility and utilization rates.
keywords: Real options |Capacity investments |Volume flexibility
Ambiguity aversion in buyer-seller relationships: A contingent-claims and social network explanation
بیزاری از ابهام در روابط خریدار - فروشنده: یک توضیح ادعای مشروط و شبکه اجتماعی-2018
Negotiations between buyers and sellers (or suppliers) of goods and services have become increasingly important due to the growing trend towards international purchasing, outsourcing and global supply networks together with the high uncertainty associated with them. This paper examines the effect of ambiguity aversion on price negotiations using multiple-priors-based real options with non-extreme outcomes. We study price negotiation between a buyer and seller in a dual contingent-claims setting (call option holding buyer vs. put option holding seller) to derive optimal agreement conditions under ambiguity with and without social network effects. We find that while higher ambiguity aversion raises the threshold for commitment for the seller, it has equivocal effects on the buyers negotiation prospects in the absence of network control. Conversely when network position and relative bargaining power are accounted for, we find the buyers implicit price (or negotiation threshold) decreases (or increases) unequivocally with increasing aversion to ambiguity. Extending extant real options research on price negotiation to the case of ambiguity, this set of results provides new insights into the role of ambiguity aversion and network structures in buyer-seller relationships, including how they influence the range of negotiation agreement between buyers and sellers. The results also help assist managers in formulating robust buying/selling strategies for bargaining under uncertainty. By knowing their network positions and gathering background information or inferring the other partys ambiguity tolerance beforehand, buyers and sellers can anticipate where the negotiation is heading in terms of price negotiation range and mutual agreement possibilities.
keywords: Buyer-seller relationships |Real options |Supply networks |Social networks |Multiple-priors |Ambiguity
Modeling managerial behavior in real options valuation for project-based environments
مدلسازی رفتار مدیریتی در ارزش گذاری گزینه های واقعی برای محیط های مبتنی بر پروژه-2018
Project valuation, as a decision-making tool for initiating investments in projects, should be able to value project flexibilities and incorporate reasonable risk preferences of relevant decision makers. Real options valuation methods are the available approaches for valuing project flexibilities, whereas they have shortcomings in considering managers’ reasonable risk preferences in project decisions. Therefore, researchers have suggested approximating the perspective on risk of real options methods and practitioners in project management. This study proposes a fair real options valuation for project-based environments by a behavioral economic approach, which adopts binomial lattice method, Monte-Carlo simulation, and cumulative prospect theory. The results show that behavioral factors such as ‘risk attitude’ and ‘loss aversion’ should be accepted in project investment decisions while limited to an acceptable amount depending on the project conditions (e.g. uniqueness of decision-making scenarios). This research contributes to the project management domain by enhancing project investment decisions that include project flexibilities.
keywords: Project investment decisions |Project valuation |Flexibility |Managerial behavior |Fair real options valuation |Cumulative prospect theory |Loss aversion |Risk attitude |Price adjustment clause
Buyouts under the threat of preemption
خریدهای بیروتی تحت تهدید پیش دستی-2018
This paper analyses the effects of preemption fears on the buyout efficiency when firms combine non-synergistic operational activities and have asymmetric access to financing. Bidders with preemption fears are more likely to acquire target firms at an earlier development stage. However, if uncertainty is high, an acquirer may opt to wait and buy the target firm at a later stage as assets in place. The fear of preemption affects the efficient exercise of each offer differently. While the timing of a hostile takeover under threat of preemption converges to an efficient global optimiser threshold, negotiated mergers are exercised inefficiently too early. Premiums to the target firm are higher when the firm is acquired at an earlier stage, and when the bidder fears being preempted.
keywords: Buyouts |Real options |Fear of preemption
An efficient algorithm based on eigenfunction expansions for some optimal timing problems in finance
یک الگوریتم کارا بر مبنای ویژه تابع بسط برای برخی از مشکلات زمان بندی مطلوب در امور مالی-2016
Article history:Received 18 November 2014 Received in revised form 4 May 2015Keywords:Optimal switching and optimal multiple stoppingDiffusions and subordinate diffusions Eigenfunction expansionsInterest-rate chooser flexible caps/floors Commodity swing optionsReal optionsThis paper considers the optimal switching problem and the optimal multiple stopping problem for one-dimensional Markov processes in a finite horizon discrete time framework. We develop a dynamic programming procedure to solve these problems and provide easy-to-verify conditions to characterize connectedness of switching and exercise regions. When the transition or Feynman–Kac semigroup of the Markov process has discrete spectrum, we develop an efficient algorithm based on eigenfunction expansions that explicitly solves the dynamic programming problem. We also prove that the algorithm converges exponentially in the series truncation level. Our method is applicable to a rich family of Markov processes which are widely used in financial applications, including many diffusions as well as jump–diffusions and pure jump processes that are constructed from diffusion through time change. In particular, many of these processes are often used to model mean-reversion. We illustrate the versatility of our method by considering three applications: valuation of combination shipping carriers, interest-rate chooser flexible caps and commodity swing options. Numerical examples show that our method is highly efficient and has significant computational advantages over standard numerical PDE methods that are typically used to solve such problems.© 2015 Elsevier B.V. All rights reserved.
Optimal switching and optimal multiple | stopping | Diffusions and subordinate diffusions | Eigenfunction expansions | Interest-rate chooser flexible caps/floors | Commodity swing options | Real options
Investment timing under political ambiguity
زمان بندی سرمایه گذاری تحت ابهام سیاسی-2015
In addition to economic risks, the economic success of investments often critically depends on the uncertain results of future political regime switches. Therefore, it is essential that policy makers, who design tax schemes or subsidy payments, understand the combined effects of risk and ambiguity on an investor’s investment behavior given subjective estimations and individual preferences. Using a practical example from the shipping industry, we set up a real options model that takes into account two sources of uncertainty, economic risk as well as political uncertainty regarding an imminent regime switch. We calculate the option value of the investment possibility subjectively estimated by the investor and derive the optimal investment-timing strategy. Furthermore, we analyze both the sole as well as the combined influence of economic risk, the investor’s subjective assessment of political risk and political ambiguity on both the option value and the investment- timing strategy. Keywords: Optimal investment timing | Real options | Ambiguity | Political uncertainty | Regime switching | Green investments