Managing Risks of Supply-Chain Disruptions: Dual ... - CiteSeerX

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Chapter 4Real Options PresentationReal Options analysis permits the evaluation of capital investment strategies that are made underuncertainties and integrate flexible decision-making processes. The purpose of this chapter is toexplain briefly the concept of real options, show the different methods of valuation and indicatehow firms should manage their options.4.1 Definition4.1.1 Definition by similarity with financial optionsReal options have a definition close to that generally retained for the financial options. Just likethem, they can be distinguished according to their nature: there are options to buy (call) and optionsto sell (put).Call options give to their holder the right to undertake an investment, at a cost that is fixed inadvance (the exercise price), at or before a given date (the maturity). For example keepingunexploited leases can be assimilated to a call option. Oil companies do not sell or exploit theseleases as they want to keep the right to develop them later on; they may, for example, decide to usethis right if ever new drilling and production technologies allow to increase recoverable reserve.This is a call option since the exploitation makes it possible to get the income of the underlying. Itsexercise price is the investment cost to initiate the production, and the maturity is simply the dateuntil which firms have the authorization to exploit.Put options allow one to give up an investment or to resell it at a price that has been set in advance,at or before a given date. Abandoning a project for its salvage value is a typical example of a putoption. For example if the market performs poorly, a company may have a valuable option toabandon its plant permanently in exchange for its salvage value (i.e, the resale value on itsequipment and other assets on the second-hand market). In this case, the price of exercise isidentified with the value that the plant represents for the company, and this value must becompared with the resale price on the market.However the similarity between financial and real options is limited and some differences exist.32
For example, there is no market for real options. Also, if financial option characteristics are easilyknown, it is much more difficult to get this kind of information for real options. In fact the maindifference comes from the nature of the underlying asset.4.1.2 The different types of optionThere are various types of real options such as options to defer investment, options to expand,options to abandon or options to switch. Table 4.1 introduces the most common types..33
Page 1: Managing Risks of Supply-Chain Disr
Page 4 and 5: AcknowledgementsI would like to exp
Page 6 and 7: 4.2.5 Conclusions .................
Page 8 and 9: List of FiguresFigure 1.1: Strategy
Page 11 and 12: Chapter 1Introduction.Modern supply
Page 13 and 14: - Levels 2 and 3--between these two
Page 15 and 16: 5. In terms of implementation, Forr
Page 17 and 18: Some articles focus precisely on di
Page 19 and 20: 2.3 Secure the Supply-ChainThere ar
Page 21 and 22: 1) Firms need to build a resilient
Page 23 and 24: at ports and airports and along the
Page 25 and 26: 2.6 Conclusions- Increase the secur
Page 27 and 28: The most adapted approach (single V
Page 29 and 30: suppliers’. The main objective of
Page 31: Some people continue to think that
Page 35 and 36: 4.1.3 Option ValueJust like a finan
Page 37 and 38: - I0: initial investmentThe problem
Page 39 and 40: Re plicating portfolio in the up st
Page 41 and 42: Let’s consider a portfolio compri
Page 43 and 44: The differential equation is quite
Page 45 and 46: value of the cash flows of the proj
Page 47 and 48: update their option management stra
Page 49 and 50: Chapter 5OptionModeling Dual-Sourci
Page 52 and 53: We will describe the firm’s curre
Page 54 and 55: investment costs are denotedIMainSu
Page 56 and 57: 5.4 Programming on MatlabTo solve t
Page 58 and 59: Chapter 6Results of the ModelThis c
Page 60 and 61: uses the main supplier its profits
Page 62 and 63: drivers - in particular at the time
Page 64 and 65: what will happen. To hedge this dem
Page 66 and 67: 6.5 Conclusions- Real options allow
Page 68 and 69: market share from its competitor.7.
Page 70 and 71: = 0.99 * ($100) + 0.01* (-$200)= $9
Page 72 and 73: Table 7.1: Assumption on Parameter
Page 74 and 75: 7.2.4 Exploit at maximum real optio
Page 76 and 77: developed “ a general simulation
Page 78 and 79: (13) Lee, H.L., Wolfe, M. (2003),
Page 80 and 81: and Supply Management Course.(38) Z
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to reserve for the future, by maxim
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APPENDIX B: PARAMETER VALUES USED T
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normal or in disruption.The program
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% Probability of going from (m,k,j)
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elsevalue.DecOneNormal=3;end-------
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Managing Risks of Supply-Chain Disruptions: Dual ... - CiteSeerX

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