5.1. The opportunity to change decisions

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来自 Moscow Institute of Physics and Technology 的课程

Principles of Corporate Finance – A Tale of Value

5 个评分

Moscow Institute of Physics and Technology

Principles of Corporate Finance – A Tale of Value

5 个评分

课程 2（共 5 门，Specialization Understanding Modern Finance）

The study of Corporate Finance seems to be a very generic part of business education. Still, it either falls in the trap of intimidating formulas or is superficially journalistic. Both extremes preclude the understanding of the core finance ideas, concepts, and models. This Course is an attempt to avoid the above extremes. We discuss the core basis and mechanisms of modern corporate finance in a learner-friendly way. We will analyze the market’s most fundamental problems, realize the intrinsic interests and preferences of investors, reveal the true meaning of specific financial terms, and uncover important issues that are so often ignored in choosing and valuing investment projects. The learners will gain insight into the essence of corporate finance. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses.

从本节课中

Options – Idea, Role, and Valuation

Week 5 of the Course is devoted to options – one of the most interesting and advanced areas in finance. We start with definition, charts, payoffs – the basics of options. Then we move on to option valuation. We discuss replication and risk-neutral approaches and show on clear examples how they allow finding the option’s value under simplifying assumptions. We go further and discuss the generalizations of the simple approaches that lead to the Black–Scholes and binomial option valuation methods. Then we discuss the application of the option theory to valuing real investment projects that contain some options – the timing of investment, the abandonment, the follow up options. We show how decision trees and the option identification contribute to the better choice of investment projects. Finally, we briefly describe one of the most advanced topics in finance – the valuation of fixed-income instruments with embedded options and fixed-income derivatives including mortgage-backed securities and CMO’s.

5.1. The opportunity to change decisions7:28

5.2. Options – definition, charts, payoffs16:34

5.3. Option valuation (1) – ideas and approaches11:08

5.4. Option valuation (2) – Black–Scholes, binomial17:11

5.5. Option application (1) – real investment projects4:40

5.6. Decision trees and the option identification11:03

5.7. Options on future investments9:09

5.8. Option application (2) – valuing risky debt18:56

5.9. Valuing bond options – an overview14:06

与讲师见面

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

Welcome everyone to a fifth week of our corporate finance course.

We've done a great job in the previous four weeks in analyzing investment projects.

We studied the cash flows,

we talked about risk,

we've applied the universal NPV criterion.

At the end of last week,

we have come up with the way the average cost of capital formula,

and it seems that we are close to be all set.

However, there is one important thing that we haven't talked about before but that

plays a crucial role in the correct analysis of investment projects.

What is this? Well, we have to deal with change.

Now, what do we mean by change?

Because change is, to an extent, a buzzword, too.

Well, I'll put it here, change.

When we talked about investment portfolios,

we said that investors hold some portfolios of stocks, bonds,

and other instruments, and they just move together with the market.

So this is sort of a passive approach.

When however, you talk about management of investment projects in a company,

you take a more active approach and you can change something when the project unfolds.

What is this?

Well, first of all,

I will point this out that this is sort of active management.

Now, what else?

Remember, we talked at the very beginning of

this course about the fact that when we put the time,

a moment now or zero that is moving,

we said that that value arise from the future.

And even if we wait for some time, then still,

there is going to be a lot of unknown in the future,

and we will never be able to wait long enough to remove this uncertainty.

However, information does arrive when the time goes by and some of this information may

not only be important but crucial in our measures in this active management.

So, I will put it, information arrival.

And taken together, that leads us to the following idea.

Well, what if in this process of the project management,

when the new information arrives,

we have the choice of changing something?

Well, when this is taken to the extreme, let's say,

we have the choice to stop the project altogether

or we have the choice to enlarge the project.

So, all this leads us to the idea of

some benefits of making decisions in the future.

Let me give you an example.

Let's say, you started to build a plant and six months have passed.

And well, you may not stop building this plant.

It seems to be a very bad decision because if you stop building it, let's say,

you started to just build the building itself,

and then you just started to order equipment.

So, you clearly cannot produce a penny of cash flow with this unfinished land.

But what if six months from now,

you will have learned that the product that you planned to

produce at this plant is going to

be obsolete by the time you will have completed the plan?

So, you will not generate anything but losses.

In this case, you can see that proceeding or being, let's say,

stubborn with finishing this plant building may be a very bad idea.

You may, well, write off these losses,

but if you have the ability to stop that at this point in time,

that's a very important and potentially valuable option.

Now having said all that,

I produced or pronounced the word option for the first time but all that

leads us to this fundamental idea of an option.

That, as many believe,

is the key idea of modern finance.

Now, when we hear the word option, most immediately,

the people start talking about listed options and trade it

at the Chicago Board of Options Exchange, for example.

And then immediately, they may recall some of

the very advanced math formulas that they used in the option valuation and that

they know that this is sort of really something very much difficult

and that requires advanced math background.

Now, we will deal with options only to the extent we need to

understand them and understand how people value

them in the application to real investment projects.

I will say a few words about some other areas where options play the key role,

but we are limited with our ability to proceed with

really very much advanced approach that requires this very hard math.

Now, in general, I have to say right now that in

option valuation there is a dilemma. There are two ways.

One is sort of a more journalistic way,

a more descriptive way in which we just talk about how all that

works and do not produce any valuation formula.

The other approach is to proceed with advanced math,

and then on this path,

we clearly are sort of stuck because that requires a dense background.

Now, I will try to avoid these two pools but instead,

we will use some math when it is absolutely required.

We will not go that far away and when we will see where that leads,

we will then go in a little bit more descriptive way.

So that way, we will be able to kill two birds with one stone namely,

we will come up with some understanding and also some way of how we can lead,

how we can get a number and not only just the idea of that.

This is in general valuable or not.

So from now on,

I will wrap up this introductory episode and starting with the next one,

we will talk about options in some more detail just because,

like I said, this is not only the most important idea in modern finance

but also because we will see how that contributes to the value of investment projects.

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