Document 13688495
advertisement
Objectives Real Options Implications for Regulatory Policy Uncertainty Modelled Dynamic Models Regulation Modelled Cost of Regulation Estimated James Alleman & Paul Rappoport University of Colorado & Temple University Experts Dialogue: Managing Risk in the Competitive Environment International Telecommunication Union Geneva, Switzerland 28-29 October 2004 Copyright © 2004 James Alleman. All Rights Reserved. James Alleman & Paul Rappoport Agenda Overview/Literature Review Overview/Literature Review Real Options Regulatory Distortions Investment Criterion Implications for Regulation Future Research James Alleman & Paul Rappoport Regulatory Models Dynamic Models Real Options Approach Colorado University & Temple University James Alleman & Paul Rappoport Colorado University & Temple University Dynamic Models Regulatory Models Investments Distortions Growth Models Certainty Wrong incentives Averch-Johnson Complete information Exogenous depreciation Static/Comparative Static Certainty James Alleman & Paul Rappoport Colorado University & Temple University Colorado University & Temple University James Alleman & Paul Rappoport 1-6 Colorado University & Temple University Real Options Agenda Valuation Models Overview Real Options Project valuations No retail pricing What are they? Types of Options No Regulatory Models James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport What Are Real Options? Types of Options Financial Option Analogy Defer Right Not obligation Upside potential (profit) Limit downside risk (loss) James Alleman & Paul Rappoport To wait to determine if a "good" state-of-nature obtains Colorado University & Temple University James Alleman & Paul Rappoport Types of Options Colorado University & Temple University Types of Options Defer Abandon Defer Abandon Shutdown & Restart To obtain salvage value or opportunity cost of the asset James Alleman & Paul Rappoport Colorado University & Temple University To wait for a "good" state-of-nature and re-enter Colorado University & Temple University James Alleman & Paul Rappoport 7-12 Colorado University & Temple University Types of Options Types of Options Defer Abandon Shutdown & Restart Time-to-build Defer Abandon Shutdown & Restart Time-to-build Contract To delay or default on project - a compound option James Alleman & Paul Rappoport To reduce operations if state is worse than expected Colorado University & Temple University James Alleman & Paul Rappoport Types of Options Types of Options Defer Abandon ... Contract Switch Defer ... Contract Switch Expand/Growth/Learn To use alternative technologies depending on input prices James Alleman & Paul Rappoport To expand if state-of-nature is better than expected Colorado University & Temple University James Alleman & Paul Rappoport Types of Options Colorado University & Temple University Agenda Defer Abandon Shutdown & Restart Time-to-build Contract Switch Expand/Growth/Learn James Alleman & Paul Rappoport Colorado University & Temple University Overview/Literature Review Real Options Regulatory Distortions Colorado University & Temple University James Alleman & Paul Rappoport 13-18 Colorado University & Temple University Assumptions/Model Regulatory Distortions Revenue Constraint go Rate-based, rate-of-return Price Caps Interconnection prices UNEs price ceiling Modelled as "Good" Ceiling q1 1 - q1 stop James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Regulatory Distortions Regulatory Distortions q1 1 - q1 revenue constraint q1 stop James Alleman & Paul Rappoport Colorado University & Temple University 1 - q1 Colorado University & Temple University stop James Alleman & Paul Rappoport Regulatory Distortions Colorado University & Temple University Regulatory Distortions Revenue Constraint Defer: To wait to determine if a "good" state-of-nature obtains Rate-based, rate-of-return Price Caps UNEs price ceiling Modelled as "Good" Ceiling Defer James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport 19-24 Colorado University & Temple University Delay: Waiting to Invest Description of Options Value in Waiting Like Call Option Influences: Revenue Constraint Defer: To wait to determine if a "good" state-of-nature obtains Abandon: To obtain salvage value or opportunity cost of the asset uncertainty foregone profits Choice: Max [immediate investment, waiting, 0] James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Regulatory Distortions Colorado University & Temple University Regulatory Distortions Price Ceilings Price Ceilings Revenue constraints Price setting (UNEs/Interconnection) Revenue constraints Price setting (UNEs) Obligation to Serve Obligation to Serve Universal service Universal service Lack of delay James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Regulatory Distortions Colorado University & Temple University Regulatory Distortions Price Ceilings Price Ceilings Revenue constraints Price setting (UNEs) Revenue constraints Price setting (UNEs) Obligation to Serve Obligation to Serve Universal service Universal service Pay telephones Lack of delay Lack of abandonment James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport 25-30 Colorado University & Temple University Regulatory Distortions Regulatory Distortions Price Ceilings Price Ceilings Revenue constraints Price setting (UNEs) Revenue constraints Price setting (UNEs) Obligation to Serve Obligation to Serve Universal service Pay telephones Universal service Lack of delay Lack of abandonment Lack of abandonment James Alleman & Paul Rappoport Pay telephones Lack of abandonment Colorado University & Temple University James Alleman & Paul Rappoport Regulation Distortions Agenda Costly Overview/Literature Review Real Options Regulatory Distortions Investment Criterion Cash flow constrained Delay-cash flow constrained Abandon-cash flow constraint Unrecognized Cost James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport A Risk-Neutral Model (Continuous Additive) RS0 S0 S1 t=0 Colorado University & Temple University A Risk-Neutral Model (Continuous Additive) RS0 S0 Colorado University & Temple University t=1 S1 t=0 t=1 S 1 E 1 = RS0 = S0 R R James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport 31-36 Colorado University & Temple University A Risk-Neutral Model (Continuous Additive) Call Option RS0 S0 t=1 σ S1 ≡V R V S0 K James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Call Option f(V) t=0 Probability S1 V Colorado University & Temple University Call Option Price +∞ C = Eˆ [P (V )] = ∫ P (V )f (V )dV V S0 K James Alleman & Paul Rappoport James Alleman & Paul Rappoport 3.2 Defer Option Defer Option f(V) V Colorado University & Temple University Example Call Option Present value of a project’s future cash flow S Stock price Investment to acquire the project assets K Exercise price Length of time the decision may be deferred T Time to expiration Time value of money rf Risk-free rate of return Riskiness of the project assets σ2 Variance of returns on stock James Alleman & Paul Rappoport V-K S0 K Colorado University & Temple University Probability Payoff : P(V) V-K f(V) Probability Payoff : P(V) −∞ Defer Option Variable Present value of operating future cash flow S $100 million $110 million Investment to Equipment at time T=1 KT T 1 year Length of time the decision may be deferred 6% Risk-free rate rf Riskiness of the project $30 million σ Colorado University & Temple University James Alleman & Paul Rappoport 37-42 Colorado University & Temple University ROV (Real Option Value) Net Present Value PV[Cash out] = PV[KT] = 110/1.06 = 103.8 PV[Cash in] = S = E[ PV[S1]] = 100 NPV = PV[cash in] – PV[cash out] = 100 – 103.8 = - 3.8 James Alleman & Paul Rappoport +∞ C= ∫ (V − K )f (V )dV = 10.2 K ρ V-K V K=110/1.06=103.8 S=100 Colorado University & Temple University James Alleman & Paul Rappoport 3.4 ExNPV Colorado University & Temple University Methodology Expanded NPV When is ExNPV = 0, when NPV < 0? 10.2 M 6.4 M - 3.8 M NPV + ROV = Conventional Value of Project = ExNPV = Flexibility value to defer James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Methodology Methodology If NPV < 0, when is ExNPV = 0? i.e. ExNPV = ROV + NPV = 0 When is ExNPV = 0, when NPV < 0 ? ExNPV > 0 ExNPV < 0 Wait and watch the market! Colorado University & Temple University Do not invest ExNPV = 0 James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport 43-48 Colorado University & Temple University Methodology Solve When is ExNPV = 0, give NPV < 0? ExNPV = ROV + NPV = 0 v= V −S σ +∞ ∫ (V − K )f (V )dV + (S − K ) = 0 K D≡ V-K σ |S −K | σ : Normal distribution (0,1): fN(v) | NPV | riskiness = V S K James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Solve Solve +∞ +∞ K K ∫ (V − K )f (V )dV + (S − K ) = 0 ∫ (V − K )f (V )dV + (S − K ) = 0 +∞ +∞ D D ∫ (v − D )fN (v )dv − D = 0 ∫ (v − D )f N (v )dv − D = 0 1 1 1 exp − D 2 − D 2π 2π 2 LHS ( left hand side ) James Alleman & Paul Rappoport Colorado University & Temple University −D 1 ∫ exp − 2 v −∞ 2 dv − D = 0 LHS ( left hand side ) Colorado University & Temple University James Alleman & Paul Rappoport Solve Colorado University & Temple University Criterion 0.3 ExNPV > 0 0.2 D* = 0.2773 0.1 ExNPV < 0 0 -0.1 -0.2 -0.3 0.10 0.15 0.20 James Alleman & Paul Rappoport 0.25 0.30 0.35 0.40 Colorado University & Temple University James Alleman & Paul Rappoport 49-54 Colorado University & Temple University Criterion Criterion ExNPV > 0 ExNPV < 0 ExNPV > 0 ExNPV < 0 LHS > 0 LHS < 0 LHS > 0 LHS < 0 D < D* D > D* James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Criterion Colorado University & Temple University Criterion ExNPV > 0 ExNPV < 0 ExNPV > 0 ExNPV < 0 LHS > 0 LHS < 0 LHS > 0 LHS < 0 D < D* D > D* D < D* D > D* Wait and watch the market! where James Alleman & Paul Rappoport D≡ |S −K | σ = | NPV | riskiness Colorado University & Temple University James Alleman & Paul Rappoport Criterion ExNPV > 0 ExNPV < 0 LHS > 0 LHS < 0 D < D* D > D* where James Alleman & Paul Rappoport σ = | NPV | riskiness Colorado University & Temple University |S −K | σ = d≡ -D* -0.276 Not Invest Do not invest D≡ |S −K | Criterion where Wait and watch the market! D≡ where Wait and watch the market S−K σ 0 D* 0.276 Invest carefully d Invest | NPV | riskiness Colorado University & Temple University James Alleman & Paul Rappoport 55-60 Colorado University & Temple University d = NPV/riskiness d = NPV/riskiness Uncertainty adjusted NPV Risk normalized NPV Uncertainty adjusted NPV Risk normalized NPV d = D* The point of ExNPV = 0 Break-even point of NPV plus ROV James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Colorado University & Temple University Loss Function S −K σ = −0.276 V-K σ S K Decision index d = NPV/Riskiness gives uncertainty adjusted NPV d = D* = 0.277 gives the break-even point of NPV plus ROV Make decision by observing d f(V) d= Probability Payoff : P(V) If d = - D*, what is the probability the project payoff > 0 ? V Probability = 39% James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Agenda Implications for Regulation Overview/Literature Review Real Options Regulatory Distortions Investment Criterion Implications for Regulation James Alleman & Paul Rappoport Colorado University & Temple University Impact on "riskiness" Reduces σ Colorado University & Temple University James Alleman & Paul Rappoport 61-66 Colorado University & Temple University Implications for Regulation Implications for Regulation Impact on "riskiness" Reduces σ v= Impact on "riskiness" Reduces σ V −S v= σ V −S σ let α equal regulatory constraint on σ i.e. ασ James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Agenda Loss Function Overview/Literature Review Real Options Regulatory Distortions Investment Criterion Implications for Regulation Future Research 0.5 loss function 0.4 0.3 0.2 0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Colorado University & Temple University 0.8 0.9 1 alpha James Alleman & Paul Rappoport Colorado University & Temple University James Alleman & Paul Rappoport Future Research Contact Information Dr. James Alleman University Colorado CB 422 UBS Boulder, CO 80309-0422 Empirical Estimates Investment phone: facsimile: mobile: e-mail: Endogenous Economic depreciation +1 303 443-4465 +1 303 492-1112 +1 917 294-1688 james.alleman@Colorado.edu Dr. Paul Rappoport Temple University Broad Street Philadelphia, PA 19075 Ramsey Pricing phone: e-mail: James Alleman & Paul Rappoport Colorado University & Temple University Colorado University & Temple University +1 215 204 5025 prapp4@comcast.net James Alleman & Paul Rappoport 67-72 Colorado University & Temple University
