Using options in assessing the effectiveness of projects
Option is the contract according to which the owner, or the holder of the option, is entitled to buy or sell a certain asset in accordance with the agreement price for a certain period of time. The buyer of the option has the right to buy or sell the asset. The seller must execute the contract in the event that the buyer decides to exercise his right. An important feature of the option is that it can not have significant negative consequences for its holder, since at any time it is possible to refuse its execution. When the contract is already concluded, all the risk associated with an unfavorable price change lies with the seller. In order for the seller to accept this risk, the buyer pays him a certain amount of money called a premium.
From the very definition of the option it follows that two types of contracts are possible: agreement on acquisition right (call option) and agreement on right to sell (option " quot; ). The price at which the option buyer can buy (sell) the underlying asset is called the execution price. The time at which the agreement ends is called the moment the option is executed.
A European type of option is defined when the purchase (sale) can be made exclusively at the time specified by the agreement, and the American option that can be executed by the buyer at any time on during the term of the agreement.
A call option seller may need to provide an option-the shares themselves, which are an underlying asset for the option, so that the call option buyer can exercise its right to buy these shares. If the seller sells a call option to shares that he does not own, say that the seller sells an uncovered call option. If the seller really owns the underlying shares, then he sells the covered call option.
The current price of the share underlying the option may be higher, equal to or lower than the exercise price of the option for this share. If the price of a basic stock is higher than a call option, say that the option is "in money". In essence, the option has an urgent value for its holder, which can be realized by executing an option and buying a share at the exercise price of the option with the subsequent resale of it at a higher market price. If the price of a basic share is below the strike price of a call option, say that the option is "no money". The same terms apply to put options, but the definitions change in the opposite direction.
As analysis of the real investment environment shows, three principal types of development options can be distinguished. First, the implementation of one project often gives the company the opportunity to invest in the next project. In this case, they talk about the option for subsequent investment, or the growth option. It is an analogue of a financial call option of the European type. An example is investing in R & D, when the implementation of one of its stages gives the company the right, but not the obligation, to carry out the next stage up to the stage of commercialization of the product.
Secondly, in the face of uncertainty, the company may be able to postpone the investments planned for implementation until the necessary information about the project or work skill is acquired. In this case, we are talking about an option to choose the time of investing, or option study. The most obvious example is the ownership of a license to develop a natural deposit or a patent for the production of a specific product that provides the company the right to implement the project. Having such a time-protected development opportunity, the company can take a wait-and-see attitude in order to start the project realization (execute an option) at the peak of the market situation or not to implement it at all.
Thirdly, the company may have the opportunity to reduce or terminate operations under the project if it does not provide the required return on funds, while using the released assets as a result more efficiently (operation in other projects or sale). This option is an "option to refuse" from an investment, or a denial option equivalent to a financial put option. The option of refusal arises if the assets involved in the project implementation are liquid on the market or allow their multiple use within existing or planned lines of business.
Growth and study options have the following features:
• Do not have obligations to make a full investment;
• The cost of their acquisition is much lower than the total amount of investment needed to develop this direction;
• provide the opportunity for full investment.
With these features, these options provide their holders with a number of advantages:
1) enable flexible management, taking into account changes in investment conditions and individual preferences of the investor;
2) possession of them limits the risk of investment, the maximum amount of which is reduced to the risk of loss of the acquisition cost of the option;
3) give the pre-emptive right to invest to competitors that do not own similar options.
The concept of an option is an important element of the theory of investments, since options are bought and sold primarily by investors and are more important to them than for financial managers. The optional methodology will be the basis for developing modern methods for analyzing real investments that take into account the non-linearity and unevenness of most economic processes. This is one of the most important areas for improving the methodological support of investment management in the 21st century. Companies that ignore this will not be able to adequately assess the effectiveness of investments in new conditions and, therefore, benefit from using the available opportunities for their development.
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