On the real options method in investment decision-making of

Risks due to market uncertainty, real options should be considered in the practical application of some uncertainty factors, the past, venture capital, business valuation, technological innovation and other practical applications of research focuses on highlighting the advantages of real options , while ignoring its implicit limitations, this article is intended to combine the basic principles of real options analysis of real options in investment decision-making application examples, and practical application of real options in question should pay attention to and summarized , apply the model to avoid the blind on the result of bias caused by making real options approach has been more extensive and effective application.

First, the basic principles of real options in recent years, the financial assets leads to the development of option pricing theory using options pricing methods for physical assets, options, also known as the right to choose, for investors, it is a right, not an obligation, options have value, it is with the volatility of the underlying asset price fluctuations, while the real options (Real Option sucked promote the use of financial options to physical assets, and about options concepts and methods used in physical assets, especially in the enterprise application investment decisions.

(A real options concept Stewart Myers (Myers, 1977) that: an investment project cash flow created by the profit from the current use of assets owned, plus a choice of investment opportunities for the future , which companies can obtain a right in the future to obtain a certain price or sell a physical asset or investment plan, and get the right price can be calculated using the option pricing formula, can be applied to investment in physical assets like evaluation of the general approach to financial options to evaluate because of its subject matter of the physical assets, so the options of this nature he would call real options. refers to the existence of real options in investment in physical assets, with the option nature of the rights. real options and traditional project investment evaluation methods (such as the common NPV method is that the biggest difference: real options theory attaches great importance to the value of flexibility in decision-making, the management flexibility (Managerial Flexibility evaluation of investment decisions as an important factor, specific words, a company to evaluate a project, with investment opportunities in the project, which as a purchase option, the option gives the company a certain period of time at an exercise price (investment cost to buy the underlying asset (the project's power to obtain the same Like financial options, the contract assets (market value of the project (the project's net present value is with the market changes and fluctuations, when the market price (net present value is greater than the exercise price (investment cost of profitable, the company will execute the option (ie, selecting investment options, but also because of the underlying asset price uncertainty about the future and has a certain value.

(B Black - Scholes option pricing model real pricing model are binary tree model, Monte Carlo simulation, Black - Scholes pricing model, this paper only used the Black - Scholes pricing model introduced. Black - Scholes pricing model assumptions: markets are efficient, that no arbitrage opportunities exist, there is no sale of the underlying asset or option transaction costs and taxes are zero, the options are European-style call option, the underlying asset does not pay dividends, stock price is continuous, and there is no jump, the stock price is subject to the log-normal distribution.

Based on the above assumptions, the Black - Scholes received the prestigious European call option pricing formula:
Second, the investment decision-making analysis of the reasons for the introduction of real options in the real options approach has not been widely used before, NPV method as the general promotion of discounted investment decision-making evaluation method that can better adapt to the time of the investment decision-making environment, but with the investment making changes in the environment, NPV method has its own shortcomings will be exposed, made since the Black and Scholes option pricing theory, continuous time since, Co.xORs and RbulnstEin discontinuous binomial distribution and then make time option pricing theory, options theory, the concept of not only promote the rapid development of financial derivatives, and applications in other areas continues to expand it in addition to the options other than the financial markets, options, ideas and theories are widely applied to investment decision-making project investment decisions in the real options into the main reasons are:
(An investment project is inherently uncertain, the uncertainty of when the investment is large enough, that to consider the investment flexibility and to wait for more information in order to avoid non-recovery of the investment decision-making mistakes, the introduction of real options to the right investment options with flexibility for the evaluation. real options approach is not by assuming that the uncertainty into certainty to eliminate uncertainty, but on the right or the analysis method and found that the value and the uncertainty as an integral part of the investment value, the value of options from most of the uncertainty of future cash flows, the higher the uncertainty, delay, the higher the value of options.

(More than two factors affect the investment value of investment projects of the value determined by the right of future growth, rather than the cash flow generated by the present decision, in actual operations, the investment activities of enterprises are not able to immediately profitable, but investment purposes is not necessarily simply in order to obtain financial interest, especially short-term benefits from the long term, pre-investment capital enterprises may be in order to occupy more market share, with a patent or to maintain access to a new market potential.

(C measurement of intangible value on intangible value, the traditional approach is simply not reflected in the more impossible to measure. Real options theory to explain the business in order to obtain future growth opportunities for the short term is not necessarily profitable, but it can be long-term expansion growth, strategic investment, and traditional methods can not focus on the future for these investment decisions and provide a theoretical support for the same time, a factor analysis of the importance of Economic development, first look at this factor in the value chain in the position or the factors the role of value creation by the size of innovation involved in all aspects of the value chain, and therefore innovation is not a part of the value chain, while the non-entity to create a flexible value, the implied value of the chain, because this value chain is invisible, and with the physical value chain with a value stored in the same system, people rarely be stripped out separately the value of intangible value creation and value-added chain, but belongs to the entity together with the value chain, so invisible value creation is often overlooked. the use of real options to establish a value system mathematical model can be the role of the intangible value chain, value creation and business in general quantitative analysis.

(D flexible business strategy of investment projects in the implementation phase, the operator can market status according to external conditions change, the flexibility to play operation, determine the production state is selected to maintain, expand, or shrink, while the NPV assuming once the investment in , in the foreseeable life in has been in business, management does not consider closing and flexible Effective management is not flexible strategy to generate a random combination of individual elements, but by the interdependence of the various enterprise resources, capabilities and change the environment of the complete system, it is not the best but there is a certain time interval may be the most comprehensive portfolio of integrated It is a dynamic process of adjustment is a continuous improvement continuum, it is this continuum of the enterprise resource , ability and environment of the business opportunity of differentiation, the formation of a corporate strategy of flexible continuum of internal and external corporate strategy logic.

(V latency delay investment from the perspective of investment, business investment based on very little investment on the basis of a single point in time, in fact, decision makers usually have a delay of investment options. Deferred investment that can help decision makers more information to evaluate project profitability, or for more resources to the project better prepared to carry out, thereby reducing the risk on investment can be delayed, NPV method assumes is not delayed, the real options pricing theory suggests that investment in a limited time in general can be delayed, the opportunity cost and weigh the option value of waiting to choose the best investment in time became the key.

Third, real options in investment decision-making instances of the application of real options analysis of investment decisions in the application of many examples, the only real option in this expansion options in the application example for analysis. A company is a manufacturer of considerable strength .2010 of a company's management estimated that there may be a huge development of new products, plans to introduce a new product technology. consider the market's growth will take some time, the project in two phases first phase investment of 12 million in late 2010 into 2011 In production, the production capacity of 500,000, related to cash flow as shown in Table 1:
The second phase investment of 25 million in late 2013 into 2014 production, production capacity of 1 million, is expected related cash flows such as 2 follows:
The company's required return rate of 10% of the risk, risk-free interest rate is 5%, assuming the second phase of the project decisions have to be decided at the end of 2013, the industry risk, uncertainty of future cash flow, comparable company's stock price standard deviation 14%, can be used as the standard deviation of project cash flow, as shown in Table 3, Table 4: Links to free download http://www.hi138.com Conclusion: Considering the expansion of the first phase of the project net present value of options = 193.1265-198.544 =- 5.4175 (million net present value method based on the decision-making criteria, since NPV <0, therefore, should not be the first investment phase of the project.

Fourth, real options in investment decision-making application should pay attention to the problem although the real options approach can avoid some of the drawbacks of traditional evaluation methods to improve the accuracy of project decision-making, but because of real option pricing model has a strict assumption, which determines Not all items are applicable to real options approach. In order to accurately evaluate the use of real options theory, investment projects, need to pay attention to the following questions:
(I note that the value of the cost of information leakage and leakage occurs because the value of the underlying asset holders have access to the underlying assets from the convenience of benefits such as dividends, patent income, storage costs, and other implicit the convenience yield, the value of leakage in the event when the value of physical assets will change accordingly, then the value of underlying assets need to leakage of the real option pricing models to make appropriate adjustments usually will set the value of leakage the same percentage as the underlying assets, such treatment is usually relatively simple, but effective, option pricing based on market completeness and effectiveness, it assumes that the market is complete, investors can get all the information, but managers in order to obtain the required information, must pay a certain cost, which needs to be adjusted expected return item to be reflected.

(B to introduce the "order options" in most cases, there is a certain variety of real options related, not only in the correlation between the number of investment projects are interrelated, and within the same project between before and after each sub-project Related Usually, investors invest, not a full-time investment, but in stages, in order to invest when the investment managers to obtain the project-related information, will re-evaluate the value of investment projects, and accordingly decided to continue to make additional investment or withdrawal of investment, and secondly, the early follow-up investments are usually implemented with the management control related only to the initial investment, have a follow-up investment opportunities, through the pre-collected information for investment decision-making follow-up Finally, managers can compare different investment path the value of investment projects, to select the optimal implementation path for the relevant stage of this investment, by introducing the idea of ​​path dependence, that the introduction of "order options" .

(Three random events on the value of the project considering the impact of real options applications in most studies, changes in the value of assets are assumed to follow geometric Brownian motion, but when some of the significant information (political, disease League www.lwlm.com China paper finishing disease problems and so appears, the underlying asset price changes occur discontinuously, that jump. Merton pointed out: the underlying stock returns are from the "standard geometric Brownian motion," caused by the continuous changes and "Poisson process" caused by the combined effect of the jump results based on this consideration, Merton (1976 established a jump-diffusion model, and this model is given in the European call option pricing formula.

(D note strike price dynamics are usually assumed in the implementation of options when they have a certain exercise price in the market environment is relatively stable, little change in investment, assuming a constant exercise price is feasible, but for the amount of ups and downs of certain investments a large investment projects, you need to realistically analyze the dynamic nature of investment, so as to more accurately assess the value of the project.

(E to use game theory to analyze real options real option holder the right line, may not have the exclusive right to purchase the underlying assets, competitors may advance the implementation of options, so the project investment decision-making process, the same can not ignore the existence of competitors, competitors need to pass out information, make the appropriate decisions for these uncertain issues that require the introduction of game theory to analyze the real options, through the introduction of game theory can be well fitted dynamic game between the behavior of competitors, in order to more accurately fit the actual decision-making process.

V. CONCLUSIONS evaluation requires both project investment decision-making comprehensive use of the two disciplines of Economics and management science to the theory of in-depth theoretical studies, but also need to be a general practice as the basis for investment decisions, therefore, with considerable difficulty and challenge. Is the valuation of real options analysis tools, discounted cash flow evaluation is a powerful complementary tool, has become a major investment project valuation reference method, with China to further relax market access conditions, for the world economy will be more the impact of China's sustained Economic development, enterprises are facing more severe environment of uncertainty, real options theory to deal with uncertainty in our business challenges, choose the best investment to play a more important role.


References:
[1] China Association of Certified Public Accountants: "Financial Cost Management>> Economic Science Press, 2010 edition.

[2] Amy Chang, Wu Weihong: <<real option pricing method in the company's acquisition of the exploration and application of >>,<< Economics and Management>> 2008 6.

[3] Ying Tan double: "Based on real options investment and financing of technological innovation path to interactive research >>,<< Jiangsu Business Discussion>> 2009 6.

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