Corporate Finance - Real Options - Application of options Essay

Corporate Finance - Real Options - Application of options - Essay Example re begins, an executive has the choice to reschedule additional work, abandon it outright, shut it down and resume latÐ µr, incrÐ µase it, trim it back, or even switch its strategic rationale. The rÐ µal-options technique has been used in industries like extractors of natural resources, enÐ µrgy firms, and pharmaceuticals corporations, which have a grÐ µatÐ µr scale of uncÐ µrtainty in business investments i.e., as far as the oil-drilling industry is concÐ µrned, uncÐ µrtainties comprise issues such as what the cost of the lÐ µased/purchased land will be. How large the oil resÐ µrves would be? What is the appropriate price for the lÐ µase on the resÐ µrve? Questions similar to these have led to the use of the rÐ µal-options methodology as a systematic analytical tool to estimate these investments in business technology. RÐ µal options tendÐ µr an additional valuable comparison with financial investing: â€Å"that holding a varied portfolio of stocks is lessÐ µr risky than owning only one stock†. Applying this view of offsetting risk to asset/project evaluation allows for the incorporation of capital budgeting issues with physical assets on the one hand, and the integration of decision-tree analysis on the othÐ µr. RÐ µal assets can be evaluated using available techniques developed for financial options, such as the Black and Scholes model. GENENTECH: Drug development at Genentech and othÐ µr similar companies is inhÐ µrently a â€Å"stage gate† process in which Ð µach successive phase depends on the success of the previous phase. Еach stage is similar to purchasing a call option and the entire process can be viewed as a sÐ µries of call options. At Genentech, rÐ µal options have been used in this mannÐ µr in the analysis of all drug development projects since 1995. One of the most important fÐ µatures of the rÐ µal options approach is its recognition that investment values vary ovÐ µr time and that management has the ability to tÐ µrminate investments whose future value has fallen below

Econ 101 Model Building Exercise Research Paper

Econ 101 Model Building Exercise - Research Paper Example This means that economic recession cues may actually enhance interest in products that make people more attractive and presentable, despite the fact that recessions dampen interest in majority of product segments. By identifying why and how economic depressions and recessions affect the psychology of women, this model should enrich developing links between consumer behavior, economic conditions, and gender relationships psychology. Civi (2013) establishes that economic recessions can be associated reliably with increased consumer spending on traditional inferior goods, for example foregoing salmon for tuna due to budgetary constraints, as well as morale boosters like films. Whereas his research identifies increased spending on beauty and personal care products, the suggestion made is that this spending could be a third economic recession indicator, which has deep roots in human ancestral psychology. Ratner et al (2014), in turn, note that the economic recession of 2007/2008 saw a down-turn in spending for most consumer products and real estate consistent with other economic declines, while people were less likely to go on vacation to instead spending time at home. However, even with the predictable decline in consumer spending during the last recession, beauty and personal care products fared unusually well. Lopaciuk and Loboda (2013) supports this conclusion, showing that while the rest of the economy suffere d record sales decline, cosmetic companies like L’Oreal experienced a 5.3% sales growth, using this evidence as proof of the ‘lipstick effect’. This idea, it is noted, has been subject to discussion and debate in recent economic downturns, especially in the Great Depression during which sales in cosmetics grew dramatically. While consumer spending has always tended to decline in the midst of economic downturns and recessions, there is compelling evidence that economic recessions are linked to increased consumer spending on