Book•
Real Options "in" Projects and Systems Design: Identification of Options and Solution for Path Dependency
18 Dec 2008-
TL;DR: In this article, the authors present an approach to improve the performance of a single-input-single-output (SISO) system using a set of tools from the Massachusetts Institute of Technology, Engineering Systems Division.
Abstract: Thesis (Ph. D.)--Massachusetts Institute of Technology, Engineering Systems Division, 2005.
Citations
More filters
••
TL;DR: In this article, the authors proposed a double entry matrix as a new model for contract flexibility, based upon existing classifications, and a case study has been selected to assess and evaluate the benefits of developing a flexible contract, building a model based on the real options theory.
197 citations
••
TL;DR: Baxter and Rennie as mentioned in this paper give an introduction to modern continuous time finance in a precise and comprehensible fashion, although the claim that the book is accessible to a reader with only some knowledge of (classical) differential calculus and experience with symbolic notation is exaggerated.
Abstract: “Notoriously, works on mathematical finance can be precise, and they can be comprehensible. Sadly, as Dr. Johnson might have put it, the ones which are precise are not necessarily comprehensible, and those comprehensible are not necessarily precise.” So starts the preface to Baxter and Rennie's recent treatise on financial calculus. The book attempts to give an introduction to modern continuous time finance in a precise and comprehensible fashion. Does it succeed? Yes, it is a very clear and precise little (233 pages) book, although the claim that the book is accessible to a reader with only “some knowledge of (classical) differential calculus and experience with symbolic notation” is exaggerated. Such a reader would find the material hard going indeed.
195 citations
••
TL;DR: This paper enhances a dynamic model to evaluate architecture adaptability over the maintenance and upgrade lifetime of a system, formulating a Design for Dynamic Value (DDV) optimization model.
Abstract: The value of a system usually diminishes over its lifetime, but some systems depreciate more slowly than others. Diminished value is due partly to the increasing needs and wants of the system's stakeholders and partly to its decreasing capabilities relative to emerging alternatives. Thus, systems are replaced or upgraded at substantial cost and disruption. If a system is designed to be changed and upgraded easily, however, this adaptability may increase its lifetime value. How can adaptability be designed into a system so that it will provide increased value over its lifetime? This paper describes the problem and an approach to its mitigation, adopting the concept of real options from the field of economics, extending it to the field of systems architecture, and coining the term architecture options for this next-generation method and the associated tools for design for adaptability. Architecture options provide a quantitative means of optimizing a system architecture to maximize its lifetime value. This paper provides two quantitative models to assess the value of architecture adaptability. First, we define three metrics—component adaptability factors, component option values, and interface cost factors—which are used in a static model to evaluate architecture adaptability during the design of new systems. Second, we enhance a dynamic model to evaluate architecture adaptability over the maintenance and upgrade lifetime of a system, formulating a Design for Dynamic Value (DDV) optimization model. We illustrate both models with quantitative examples and also discuss how to obtain the socio-economic data required for each model. © 2008 Wiley Periodicals, Inc. Syst Eng
115 citations
Cites background from "Real Options "in" Projects and Syst..."
...Real options in systems can be very effective [Wang, 2005; Kalligeros, 2006]....
[...]
...A simple example of a real option “in” a system is a spare tire on a car: It gives the driver the right (without the obligation) to change a tire at any time [Wang, 2005]....
[...]
••
TL;DR: A five-phase taxonomy of systematic procedures to enable flexibility in the design and management of engineering systems operating under uncertainty is presented, providing guidance to organize ongoing research efforts, and highlights potential contribution areas in this field of engineering design research.
Abstract: This paper presents a five-phase taxonomy of systematic procedures to enable flexibility in the design and management of engineering systems operating under uncertainty. The taxonomy integrates contributions from surveys, individual articles, and books from the literature on engineering design, manufacturing, product development, and real options analysis obtained from professional e-index search engines. Thirty design procedures were classified based on the kind of early conceptual activities they support: baseline design, uncertainty recognition, concept generation, design space exploration, and process management. Each procedure is evaluated based on ease of use to enable flexibility analysis, whether it can be used directly in collaborative design activities, and has a proven applicability record in industry and research. The organizing principles integrate the procedures into a cohesive and systematic design framework. Demonstration applications on engineering systems case studies show that it helps designers select relevant procedures in different phases of the design process, depending on the context, available analytical resources, and objectives. In turn, the case studies show that the design framework helps generate concepts with improved lifecycle performance compared to baseline concepts. The taxonomy provides guidance to organize ongoing research efforts, and highlights potential contribution areas in this field of engineering design research.
112 citations
References
More filters
•
[...]
21 Oct 1957
TL;DR: The more the authors study the information processing aspects of the mind, the more perplexed and impressed they become, and it will be a very long time before they understand these processes sufficiently to reproduce them.
Abstract: From the Publisher:
An introduction to the mathematical theory of multistage decision processes, this text takes a functional equation approach to the discovery of optimum policies. Written by a leading developer of such policies, it presents a series of methods, uniqueness and existence theorems, and examples for solving the relevant equations. The text examines existence and uniqueness theorems, the optimal inventory equation, bottleneck problems in multistage production processes, a new formalism in the calculus of variation, strategies behind multistage games, and Markovian decision processes. Each chapter concludes with a problem set that Eric V. Denardo of Yale University, in his informative new introduction, calls a rich lode of applications and research topics. 1957 edition. 37 figures.
14,187 citations
•
01 Jan 1994
TL;DR: In this article, Dixit and Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made.
Abstract: How should firms decide whether and when to invest in new capital equipment, additions to their workforce, or the development of new products? Why have traditional economic models of investment failed to explain the behavior of investment spending in the United States and other countries? In this book, Avinash Dixit and Robert Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made. In so doing, they answer important questions about investment decisions and the behavior of investment spending.This new approach to investment recognizes the option value of waiting for better (but never complete) information. It exploits an analogy with the theory of options in financial markets, which permits a much richer dynamic framework than was possible with the traditional theory of investment. The authors present the new theory in a clear and systematic way, and consolidate, synthesize, and extend the various strands of research that have come out of the theory. Their book shows the importance of the theory for understanding investment behavior of firms; develops the implications of this theory for industry dynamics and for government policy concerning investment; and shows how the theory can be applied to specific industries and to a wide variety of business problems.
10,879 citations
•
12 Sep 2011
TL;DR: In this paper, the authors deduced a set of restrictions on option pricing formulas from the assumption that investors prefer more to less, which are necessary conditions for a formula to be consistent with a rational pricing theory.
Abstract: The long history of the theory of option pricing began in 1900 when the French mathematician Louis Bachelier deduced an option pricing formula based on the assumption that stock prices follow a Brownian motion with zero drift. Since that time, numerous researchers have contributed to the theory. The present paper begins by deducing a set of restrictions on option pricing formulas from the assumption that investors prefer more to less. These restrictions are necessary conditions for a formula to be consistent with a rational pricing theory. Attention is given to the problems created when dividends are paid on the underlying common stock and when the terms of the option contract can be changed explicitly by a change in exercise price or implicitly by a shift in the investment or capital structure policy of the firm. Since the deduced restrictions are not sufficient to uniquely determine an option pricing formula, additional assumptions are introduced to examine and extend the seminal Black-Scholes theory of option pricing. Explicit formulas for pricing both call and put options as well as for warrants and the new "down-and-out" option are derived. The effects of dividends and call provisions on the warrant price are examined. The possibilities for further extension of the theory to the pricing of corporate liabilities are discussed.
9,635 citations
•
01 Jan 1989
TL;DR: The Black-Scholes analysis of stock option prices was used in this paper to model the behavior of stock prices and the Yield Curve of stock options, as well as the Black's model for option pricing.
Abstract: Contents: Introduction. Futures Markets and the Use of Futures for Hedging. Forward and Futures Prices. Interest Rate Futures. Swaps. Options Markets. Properties of Stock Option Prices. Trading Strategies Involving Options. Introduction to Binomial Trees. Model of the Behavior of Stock Prices. The Black-Scholes Analysis. Options on Stock Indices, Currencies, and Futures Contracts. General Approach to Pricing Derivatives. The Management of Market Risk. Numerical Procedures. Interest Rate Derivatives and the Use of Black's Model. Interest Rate Derivatives and Models of the Yield Curve. Exotic Options. Alternatives to Black-Scholes for Option Pricing. Credit Risk and Regulatory Capital. Review of Key Concepts.
6,873 citations