Are real options a real option for real-world finance professionals? Case study: the application of real options to evaluate investment projects in the latin american oil and gas field services industry

• Autor(a) principal: Russo, Marcelo Moreira
• Data de Publicação: 2012
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Institucional do FGV (FGV Repositório Digital)
• Texto Completo: http://hdl.handle.net/10438/10375
• topic: Real options; Opções reais; Capital budget projects; Decision under uncertainty; NPV; Option to cancel; Projetos de orçamento de capital; Decisão sob incerteza; VPL; Opção de cancelar; Administração de empresas; Opções reais (Finanças); Projetos de investimento; Incerteza (Economia)

Brazil and other emerging markets will continue to present many investment opportunities in the coming years. Finance professionals who manage the company’s capital budgeting processes will face challenges. Specific characteristics of these projects as commodity-linked prices (e.g., the case of oil and gas and agricultural projects) and the customary uncertainties related to emerging markets are additional challenges. In this scenario, a more sophisticated capital budgeting framework, Real Options, offers a more robust theory to deal with uncertainty, managerial flexibility, and volatile outcomes imbedded in these opportunities. Real Options theory assumes that the managers’ involvement in the project generates value so they might capitalize on good outcomes or reduce losses by abandoning projects with bad results. The primary objective of this research was to apply Real Options valuation analysis for an investment project valuation and discuss the process and the results of such methodology. The case study retroactively analyzed an investment project in Colombia and compared the results under traditional NPV methodology and Real Options. The valuation techniques were performed as if they had been applied at the time the project was approved and then compared with the project's actual performance. The case study evaluated two types of real options: first, the effect of an option to cancel a contract that is assessed from the perspective of the client; and second, the option to abandon and defer from the perspective of the company that will perform the investment.