The soaring number of natural hazards in recent years due largely to climate change has resulted in an even higher level of investment in flood protection structures. However, such investments tend to be made in the aftermath of disasters. Very little is known about the proactive planning of flood protection investments that account for uncertainties associated with flooding events. Understanding the uncertainties such as “when” to invest on these structures to achieve the most optimal cost-saving amount is outmost important. This study fills this large knowledge gap by developing an investment decision-making assessment framework that determines an optimal timing of flood protection investment options. It combines real options with a net present value analysis to examine managerial flexibility in various investment timing options. Historical data that contain information about river water discharges were leveraged as a random variable in the modeling framework because it may help investors better understand the probability of extreme events, and particularly, flooding uncertainties. A lattice model was then used to investigate potential alternatives of investment timing and to evaluate the benefits of delaying investments in each case. The efficacy of the proposed framework was demonstrated by an illustrative example of flood protection investment. The framework will be used to help better inform decision makers.

In this thesis two dierent problems regarding real options are studied. The rst paper discusses the valuation of a timing option in an irreversible investment when the underlying model is incomplete. It is well known that in a complete model there is no nite optimal time at which to invest if the underlying asset, in our case the value of the developed project, does not pay out any strictly positive cash ows. In an incomplete model, the situation is dierent. Depending on the market price of risk in the model, there could be an optimal nite investment time even though the underlying asset does not pay out any strictly positive cash ows. Several examples of incomplete models are analyzed, and the value of the investment opportunity is calculated in each of them. The second paper concerns the valuation of random start American perpetual options. This type of perpetuate American option has the feature that it can not be exercised until a random time has occured. The reason for studying this type of option is that it provides a way of modelling the initiating of a project, e.g. the optimal time to build on a piece of land, which can not occur until a permit, or some other form of clearance, is given. The random time in the project application represents the time at which the permit is given. Two concrete examples of how to calculate the value of random start options is given. / <p>QC 20160607</p>

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Outsourcing became an important corporate strategic issue and part of the business lexicon since the 1980s. Existing studies on outsourcing mostly focus on benefits of outsourcing such as cost saving and resource reallocation, and the results are generally ambiguous regarding outsourcing outcomes. We study three important aspects of outsourcing that were largely overlooked in the existing literature: the benefit of flexibility acquisition, the power play between the CEO and labor in outsourcing decisions, and the effects of flexibility and governance for global outsourcing. This dissertation consists of three essays and constitutes an empirical investigation that (a) what the effects of flexibility and governance are for US firms engaged in outsourcing, (b) how the power play between the CEO and labor affects the decision to outsource and its outcomes, and (c) how offshore outsourcing is decided and what the value of offshore outsourcing is. The first paper examines the influence of a firm's flexibility on its decision to outsource. It is commonly believed that flexibility is good, but there is little empirical evidence on whether flexibility affects corporate performance. The paper casts outsourcing in terms of real options and presents evidence regarding the value of flexibility for US firms engaged in outsourcing. From a real option perspective, a major source of gains from outsourcing is the flexibility it entails, compared to continued in-house production under high fixed cost and demand uncertainty. Empirical analyses include an examination of market reactions to outsourcing announcements and long-term post-outsourcing firm performance, as well as the relation between flexibility and outsourcing outcomes. The results show that market reactions are positive and significant, along with a potential synergy between outsourcing and insourcing firms. More importantly, after controlling for potential switching costs related to outsourcing, outsourcing gains are significantly associated with the presence of a firm's growth options. In addition, firm performance is related to corporate governance, underscoring the importance of effective corporate governance as a requisite to aid the realization of potential gains from outsourcing. The second paper asks the question of whether the power play between the CEO and labor affects a firm's outsourcing decisions and outcomes. Outsourcing can be viewed as a power play between the CEO and labor. Fundamentally, outsourcing may be potentially desirable because of cost saving and the value of flexibility. However, to make it happen, the CEO must negotiate with labor that may resist outsourcing because of its concern for jobs. Yet without outsourcing, the firm may lose out competitively and labor may lose even more. This paper empirically examines the extent to which outsourcing decisions and outcomes depend on CEO power and labor participation in major corporate decisions. Using the sample of US firms, we find that the likelihood of outsourcing is positively related to CEO power and negatively associated with labor power. More importantly, prior firm performance is likely to be a moderating factor in the resistance of labor against outsourcing. The long-term firm performance is found to be influenced by the power dynamics between the CEO and labor as well as the general efficacy of corporate governance. The third paper investigates the widely debated issue of offshore outsourcing. Given the diversity of cost structure, the gains from outsourcing can be potentially greater internationally than domestically. While uncertainties are greater internationally, these may be offset by the real option benefits of a multinational network. Empirical work for U.S. outsourcing firms indicates that the market valuation is greater and more significant for international outsourcing than domestic outsourcing. The gains are related to flexibility that can be obtained from multinational network. In addition, international differences in locational factors including differences in corporate governance influence the valuation gains from outsourcing as well as the division between outsourcers and insourcers. / Business Administration

Yes / The link between finance and politics (especially opinion polling) is interesting in both theoretical and empirical terms. Inter alia the election date corresponds to the effective price of an underlying at a known future date. This renders a derivative pricing approach appropriate and, ultimately, to a simplification of the approach suggested by Taleb (2018). Thus, we use an options-pricing approach to predict vote share. Rather than systematic bias in polls forecasting errors appear chiefly due to the mode of extracting election outcomes from the share of the vote. In the 2016 US election polling results put the Republicans ahead in the electoral college from July 2016 onwards. In the 2017 UK general election, though set to be the largest party, a Conservative majority was far from certain.

Exploration and production (E&P) involves the upstream activities from looking for promising reservoirs to extracting oil and selling it to downstream companies. E&P is the most profitable business in the oil industry. However, it is also the most capital-intensive and risky. Hence, the proper assessment of E&P projects with effective management of uncertainties is crucial to the success of any upstream business. This dissertation is concentrated on developing portfolio optimization models to manage E&P projects. The idea is not new, but it has been mostly restricted to the conceptual level due to the inherent complications to capture interactions among projects. We disentangle the complications by modeling the project portfolio optimization problem as multistage stochastic programs with mixed integer programming (MIP) techniques. Due to the disparate nature of uncertainties, we separately consider explored and unexplored oil fields. We model portfolios of real options and portfolios of decision trees for the two cases, respectively. The resulting project portfolio models provide rigorous and consistent treatments to optimally balance the total rewards and the overall risk. For explored oil fields, oil price fluctuations dominate the geologic risk. The field development process hence can be modeled and assessed as sequentially compounded options with our optimization based option pricing models. We can further model the portfolio of real options to solve the dynamic capital budgeting problem for oil projects. For unexplored oil fields, the geologic risk plays the dominating role to determine how a field is optimally explored and developed. We can model the E&P process as a decision tree in the form of an optimization model with MIP techniques. By applying the inventory-style budget constraints, we can pool multiple project-specific decision trees to get the multistage E&P project portfolio optimization (MEPPO) model. The resulting large scale MILP is efficiently solved by a decomposition-based primal heuristic algorithm. The MEPPO model requires a scenario tree to approximate the stochastic process of the geologic parameters. We apply statistical learning, Monte Carlo simulation, and scenario reduction methods to generate the scenario tree, in which prior beliefs can be progressively refined with new information. / text

Firms developing new products often face the challenge of making investment decisions under uncertain input-cost conditions due to the price volatilities of the materials they use. These decisions need to be made long before the final products are launched on the market. Therefore, firms who invest in the opportunity to switch materials in a timely manner will have the flexibility to react to material price changes and realize competitive advantages. However, volatile material prices may also cause a firm to delay investment. Using real-options reasoning, this article studies the influence of input-cost fluctuations on the timing decision to start new product development (NPD) and thus create the follow-on opportunity to later replace an existing product. A model that combines waiting and switching options to derive influencing factors of the flexibility value which triggers the investment is developed and tested on a sample of material substitution projects from manufacturing firms. The results show how price uncertainty of the new and the old material, their joint price development, the expected project duration, and competitive preemption are related to the propensity to delay the start of NPD. The findings provide new insights on how timing in adopting materials can be used to hedge exposure to volatile material prices. The insights are relevant for adopters and producers of new materials, as well as for policy makers who strive for supporting the diffusion of new materials. (authors' abstract)

The real estate market in Sweden in the current situation is found to be very attractive, which in return is influenced by number of elements such as interest rates, market conditions, etc. Real estate investments result in relatively large amounts, that is why investors like to be relatively sure regarding their investments, or at least that they are knowing to get their investment back in case of a sale. Real options are a complement to the calculation real estate companies does. Real options are used to take alternative solutions in regard, and also to contribute alternative values to the investment, which is mainly used if an investments outcome is not as desired. As a result to this complement to the calculation we wished to study the following: What can influence the application of real options in a real estate investing decision in private real estate companies? This study was done with a deductive method, and because of that a theoretical reference frame were formed, and afterwords investigate if the theoretical facts agreed with reality. To be able to compare the theoretical parts and the empirical parts, it was important that the empirical part was relevant to our subject. For the empirical fact to be as relevant as possible, this study was performed with a qualitative approach, and therefor four private real estate companies were interviewed, two bigger and two smaller. The real estate companies interviewed are active in the southern parts of Sweden. This study results in four conclusions drawn on the basis of the four interviewed real estate companies, regarding what can influence the application of real options in a investment decision. Three of the real estate companies finds that the risks with commercial real estates, and the external factors which influence market conditions affect their application of alternative solutions regarding their investments. All four of the real estate companies find that new incoming information and the experience, which the decision maker holds, affects application of real options. Thus, real estate companies must be able to know when and what alternative solutions to apply. / Fastighetsmarknaden i Sverige anses vara väldigt attraktiv i dagsläget, vilket flertalet faktorer bidrar till såsom ränteläge, marknadsförhållanden etcetera. Investeringar i fastigheter medför relativt stora belopp, därför tenderar investerare att vilja vara relativt säkra på sina investeringar, eller att de åtminstone kan få tillbaka den erlagda investeringen vid en eventuell försäljning. Ett komplement till de kalkyler fastighetsbolagen genomför är reala optioner. Reala optioner används för att ta alternativa lösningar i beaktan, samt för att kunna tillföra investeringen alternativa värden, vilket främst används om investeringen inte har ett önskat utfall. Detta komplement till kalkyler medförde att vi önskade undersöka; vad kan påverka tillämpningen av reala optioner vid beslut om fastighetsinvesteringar i privata fastighetsbolag? Studien genomfördes med en deduktiv metod, vilket medförde att en teoretisk referensram sammanställdes för att därefter undersöka om teorierna överensstämde med verkligheten. För att kunna jämföra de teoretiska bidragen med empirisk data gällde det att den empiriska informationen var relevant. För att det empiriska materialet skulle bli så relevant som möjligt är studien genomförd enligt en kvalitativ ansats, där fyra privata fastighetsbolag intervjuades, två större och två mindre. Fastighetsbolagen delades in i respektive grupp efter storleken efter deras fastighetsbestånd. De olika fastighetsbolagen är verksamma i stora delar av södra Sverige. Studien resulterade i att vi kom fram till fyra slutsatser dragna utifrån de fyra intervjuade fastighetsbolagen, angående vad som kan påverka reala optioners tillämpning vid investeringsbeslut. Tre av fastighetsbolagen ansåg att riskerna som kommersiella fastigheter har, samt de yttre faktorer som påverkar marknadsförhållandena spelar in på deras tillämpning av alternativa lösningar på sina investeringar. Alla fyra fastighetsbolagen ansåg att ny information som tillkommer och erfarenheten som beslutsfattaren besitter påverkar tillämpningen av reala optioner. Således är fastighetsbolagens förmåga att veta om vilka alternativa lösningar som kan tillämpas och när viktiga.