Problem Session 8 - Options

Problem Session 8 - Options - MS&E 352 Decision...

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Unformatted text preview: MS&E 352 Decision Analysis II Problem Session 8 On Todays Menu Options Quick review of Open-Closed Loop, Dominance DA III & The Ethical Analyst Options What is an Option? It is an alternative that permits or may permit a future decision following revelation of information Options, Ronald Howard Rev 4.1 May 2, 1995 Why is it useful? It helps you increase the value of a decision by not making it immediately. Oil Pipeline Example Imagine an oil pipeline being built over land that people own. How do you obtain such land? Eminent Domain Eminent domain (U.S.), compulsory purchase (United Kingdom, New Zealand, Ireland), resumption/compulsory acquisition (Australia) or expropriation (Canada, South Africa) in common law legal systems is the inherent power of the state to seize for a supposedly public reason, a citizen's private property, expropriate private property, or rights in private property, without the owner's consent, either for its own use or by delegation of the taking power to third parties who will devote it to "public uses", the most common examples being public utilities, highways, or railroads. Source: Wikipedia Legal and Social Impact is very high Property owners and activists protest the abuse of eminent domain on the steps of the Connecticut Supreme Court on the day of the oral argument to save the homes in Fort Trumbull. Alternative using Options Instead of one pipeline route Alternative using Options Consider two or more pipeline routes For each plot of land on each route, negotiate and buy an option to purchase the land later. When you get all the options on a route, exercise them and acquire the land. Benefits Voluntary Lower legal costs Examples of Options weve already studied in class? Clairvoyance Two detector problem Kuniang Case Study OPTION An alternative that permits or may permit a future decision following revelation of information Other examples of Options? Insurance Pay for the right to receive subsidized healthcare should you need it in the future Other examples of Options? Stock Options CALL OPTION Pay for the right to purchase the option at an Exercise Price, regardless of Market Price Exercise Option: Buy it at the exercise price and sell at the market price. Do so only if: market price > exercise price Option Types Contractual: Agreements with other parties to provide future decision alternatives you otherwise would not have....
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Problem Session 8 - Options - MS&E 352 Decision...

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