Managing the value of business and project as an option, Option...

4.4. Managing the value of a business and a project as an option

Option Value Factors

The Black-Scholz formula and the theorem on parity of options PUT and CALL allow

not only calculate premiums on real options, but also determine those factors of value (value drivers), influencing which managers can increase the effect of their projects and the value of the business as a whole. It is important to note that the value of the option depends, according to the Black-Scholz formula, on the following parameters:

Basic asset prices S . The higher the value of the underlying asset (in the case of real options, this is the business value), the higher the premium on the option CALL and less - on the option PUT. In the case of real options, this means that the value of possible liquidation decreases with the growth of the price of the business itself, and the value of prospects for further development, on the contrary, increases;

Execution prices . As the exercise price rises, the premium on the option CALL drops, and increases by the option PUT - . In the case of real options, this means that the more capital investment requires business development, the more valuable the opportunity for such development is. And the more the business buyers are willing to pay when liquidating for their assets, the higher the business or project is judged;

risk-free rate . With the increase in the risk-free rate in the economy, the option price CALL increases, and the option PUT - decreases;

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risk (variance). As the standard deviation (risk measure) increases, premiums on options also increase, both CALL, and PUT.

The fact is that business, especially if it is currently unprofitable, can have a price, if only because in the future the situation can change. And the more risky it is, the less predictable, the more hope for positive changes in the future it gives.

Thus, if we consider a stable business that generates cash flows, then the risk for it can have undesirable consequences. However, if we consider business as an option for possible enrichment in the future, then the risk, on the contrary, creates, rather than destroys, value. Uncertainty breeds the belief in a better future, because in muddy water the size of the proposed fish is limited only by the imagination of the fisherman and the volume of the pond. Therefore, business is also evaluated higher with increasing uncertainty;

time before execution . The longer the time period before the option is exercised, the greater the chances that the option will be profitable in the future (even if now its performance would be unprofitable). Therefore, with the growth of time to execution, any option is more expensive, with other things being equal.

Accounting for Values ​​of Values ​​in Project Management

What does all this mean? That the project manager should take care not only of maximizing net cash inflows and minimizing the weighted average cost of capital, as suggested by traditional OR technology. For effective project management, initiators may want to:

a) business gave hope for a sharp positive change in the situation in the future, i.e. that he was sufficiently risky in the good sense of the term;

b) could be reduced in the case of undesirable development of the situation, reoriented or liquidated, and its assets at liquidation would be assessed rather high;

c) could easily be expanded or replicated on other sites in the event of a positive development of the situation, and investment of capital in the expansion would be minimal;

d) these opportunities for managerial influences (ie, output, expansion, etc.) remained with the initiator as long as possible and he would have enough time to think before deciding to start or continue , stopping or suspending the project.

Many of these opportunities are achieved by agreement of the parties participating in the project. Therefore, it is very important to assess not only the cash flows of the project, but also the options that each interested party receives. In particular, a competently drawn up contract, a structured structured transaction, etc. can increase the effect of the project and the business as a whole.

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