Real Options

Course Code :2024TEWMHI
Study domain:Research Methodology
Academic year:2019-2020
Semester:2nd semester
Contact hours:30
Credits:3
Study load (hours):84
Contract restrictions: No contract restriction
Language of instruction:English
Exam period:continuous assessment
Lecturer(s)Peter Kort

3. Course contents *

The topic of the course is real options theory. The book by Dixit and Pindyck (1996) is treated. It concerns 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. We conclude that the combination irreversibility and uncertainty creates an incentive for the firm to wait with investment.

The main part of the course considers single decision maker problems of firms operating in monopoly or perfect competition markets. However, at the end we will also deal with the problem of investment timing in an oligopoly framework. This requires a merge between game theory and real options. Here the conclusion is that firms have an incentive to invest earlier than its rivals. The confrontation of this effect with the value of waiting effect described above implies an interesting trade off.

The examination consists of writing a paper about a real options article that recently has appeared in the literature. A list with suitable articles will be provided.