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Real Options

Code: 2MiF23     Acronym: OR

Keywords
Classification Keyword
OFICIAL Management Studies

Instance: 2020/2021 - 2S

Active? Yes
Course/CS Responsible: Master in Finance

Cycles of Study/Courses

Acronym No. of Students Study Plan Curricular Years Credits UCN Credits ECTS Contact hours Total Time
MIF 47 Official Syllabus after 2020-2021 1 - 3 21 81

Teaching Staff - Responsibilities

Teacher Responsibility
Paulo Jorge Marques de Oliveira Ribeiro Pereira

Teaching - Hours

Theoretical and practical : 1,50
Type Teacher Classes Hour
Theoretical and practical Totals 1 1,50
Paulo Jorge Marques de Oliveira Ribeiro Pereira 1,50

Teaching language

English

Objectives

“For most investments, the usefulness of NPV rule is severely limited…, [modern finance] is now obliged to treat all major investment decisions as option pricing problems”

(Stephen A. Ross, MIT)

Real options is a major topic in corporate finance. It is intended that students develop the capacity to look at an investment project as an option or as a set of options, and not simply as a sequence of cash flows. This is a new and fundamental perspective to evaluate investment opportunities under uncertainty, irreversibility and flexibility. 

Learning outcomes and competences

The main aim is that students master the main valuation models of real options being able to apply them to real-world situations. The course will give special attention to the estimation of parameters, the choice and application of the models, the interpretation of results, and also to the adequate decision-making. Aspects such as analytical skills and critical thinking will be essential throughout the course.

Working method

Presencial

Program

1. Introduction to Real Options Valuation

2. Option to Invest

3. Option to Abandon

4. Entry-Exit Compound Option

5. Real Options Under Competition
5.1 Hidden Competition
5.2 Leader/Follower Competition

6. Special Topics on Real Options Valuation
6.1 Investment Incentives
6.2 Mergers and Acquisitions
6.3 Finite Monopolies: the value of patent protection
6.4 Entrepreneurial Financing

Mandatory literature

Dixit, Avinash and Robert Pindyck; Investment under Uncertainty, Princeton University Press, 1994
Trigeorgis, Lenos ; Real Options: Managerial Flexibility and Strategy in Resource Allocation, The MIT Press, Cambridge (MA), 1996

Teaching methods and learning activities

The teaching method includes moments where the main theoretical and conceptual aspects will be presented, and also moments where concepts and theories will be applied by solving real-world problems and case studies. In some of them, students will participate in the construction of models, from the assumptions to the final solution. Theory and practice will always be in line, in order to transmit the "intuition" about the models, as well as its usefulness and applicability. The aim is to give the students the ability to "see" an investment opportunity from the perspective of real options, identifying and applying the appropriate valuation technique, and also to decide in accordance with the results.

Evaluation Type

Distributed evaluation with final exam

Assessment Components

Designation Weight (%)
Exame 50,00
Trabalho escrito 50,00
Total: 100,00

Amount of time allocated to each course unit

Designation Time (hours)
Estudo autónomo 65,00
Frequência das aulas 21,00
Trabalho escrito 18,00
Total: 104,00

Eligibility for exams

Minimum grade of 9.5 (out of 20) considering the different assessment components.

There is, however, a minimum acceptable grade for the exam, which corresponds to 7.5 (out of 20). There is no minimum grade for the other components.

Calculation formula of final grade

Week-problems: 20% (2, 10% each); 3 students per group;

Group assignment: 30% (2 students); 3 students per group;

Final Exam: 50%

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