Week 7 Flashcards
How would you describe a opportunity in E and S in a “real option”
On the long side, calls result from grasping E and S opportunities
The intrinsic value of the long call increases with the size of the positive externality (opportunity)
- Example invest in new technology now (premium) and scale up when new technology becomes competitive
How would you describe companies that destroy value in E and S in a “real option”
On the short side, puts are written by incumbent companies that currently destroy value on E or S
The intrinsic value of the short put increases with the safety-accident or environmental spill not happening (risk)
Underinvest in safety (premium) and pay-out when accident happens (payout can almost bankrupt company)
Examples: Boeing 737 Max and BP Deep Horizon oil spill
How would you describe Boeing taking short-cuts in safety in a real option
What is a real option
A real option is the opportunity to make a particular business decision, exemplifying the value of flexibility
Companies can create long call options, to grasp opportunities on E and S
But companies also have a lot of put options against society, but awareness of it is low: this calls for an integrated view on options or integrated value expressed in real options
What are the rules of an integrated balance sheet?
You can make an integrated balance sheet. Remember the rules for SV and EV are:
* positive value = assets
* negative value = debt
* assets – debt = equity
* equity can be negative (when debt is bigger than assets)
