REAL OPTIONS ANALYSIS (2)
TOPICS COVERED
REAL ASSETS AND REAL OPTIONS
EXAMPLES OF REAL OPTIONS / TAXONOMY OF RO
COMPARISON OF REAL OPTIONS AND FINANCIAL OPTIONS
ESTIMATION OF PARAMETERS FOR OPTION VALUATION
MODELS
EXAMPLES OF EXOTIC OPTION PRICING FORM

REAL OPTIONS PART 1: Outline of topics covered:
Non Traded Assets
Project valuation for valuing non traded assets / projects
i.e. investment decision rules for new projects (e.g. real
estate development) npv, irr as decision rules: worked
examples
ris

ACST829 LECTURE : The Binomial Option Pricing Method
The binomial option pricing method is an important topic in option
pricing theory for several reasons:
1. It is a very useful numerical technique for valuing option
contracts. It can be used to numerica

OPTIONS, BLACK SCHOLES FORMULA AND MONTE CARLO
SIMULATION
Statistical Model of Asset Prices
A commonly used model for asset prices (shares, gold, oil etc) is to
assume that the continuously compounded rate of price appreciation over
a particular time fram

ACST829: SENSITIVITY AND BREAKEVEN ANALYSIS
There are various ways of dealing with risk in project evaluation.
Normally a project evaluation involves developing a model /
projection / forecast of the future cashflows of the project and then
computing the

Lecture 6/7: PART 1 - PROJECT EVALUATION METHODS
Reading: Chapter 6 of Capital Budgeting by Dayanda et al
There are 2 groups of project evaluation techniques:
Discounted Cash Flow (DCF ) analysis and
Non-Discounted Cash Flow (NDCF) analysis
DCF analysis

ACST829 LECTURE 5
Lease vs Buy analysis (Reading: Chapter 5 of Beninga)
In this section we compare leasing an asset with a long term lease
to the alternative of buying the asset with borrowed funds. The
type of lease we consider is one that "transfers sub

Lecture 4: FORECASTING QUANTITATIVE TECHNIQUES
Reading: Chapter 3 of Capital Budgeting by Dayanda et al
Forecasting is important in many facets of business:
farmers want to forecast demand for various types of crops
when deciding what to plant next sprin

MATRIX ALGEBRA AND SOLVING SIMULTANEOUS EQUATIONS
Definition: A mn matrix is a rectangular array of numbers. It has m rows and n
columns.
Examples:
1 2
A=
is a matrix with 2 rows and 2 columns
3 4
(a 22 matrix)
1 2 3
B=
is a matrix with 2 rows and 3 col

Lecture 3: Part 1 - Project Cashflows
Reading: Chapter 2 of Capital Budgeting by Dayanda et al
To perform project appraisal / valuation of some proposed new project, we need
to be able to estimate the cashflows associated with the new project. A new
proje

ACST829 LECTURE 2:
PV and FV when interest rates are not constant
Most of the financial maths we have developed so far in this course
is based on the assumption of constant deterministic interest
rates. In the real world, financial contracts sometimes hav

ACST829:
LECTURE 1: REVIEW OF FINANCIAL MATHEMATICS
Interest Rates:
Simple Interest Rates
Compound Interest Rates
Interest rate with compounding frequency m per annum
Effective annual interest rate
Continuously Compounded Interest Rates
Real and Nominal I

ACST829 ASSIGNMENT 1 SOLUTION
Question 1
(a) using excel:
Do XY plot of sales vs year
Do XY plot of sales vs number of households
Do XY plot of sales vs average household income
Do a line plot of sales vs year. Make sure that year appears as the X axi