© K. Cuthbertson and D. Nitzsche Figures for Chapter 19 REAL OPTIONS (Financial Engineering : Derivatives and Risk Management)

© K. Cuthbertson and D. Nitzsche Figure 19.1 : Truncated payoffs from an option The outcomes in the shaded area are not realised because you can always ‘walk away’ and not exercise the option. The lower bound for the payoff from a real call option is the additional investment cost (of expansion).

© K. Cuthbertson and D. Nitzsche Figure 19.2 : Drivers of NPV and real options NPV PV {Expected cash flows} PV {Fixed costs} RO PV {Expected cash flows} PV {Fixed costs} Interest rate Value lost over option’s life Cash flow volatility Time to maturity NPV Real Options

© K. Cuthbertson and D. Nitzsche Figure 19.3 : One-period BOPM S SuSu SdSd q 1 - q C C u = max[0,S u - K] C d = max[0,S d - K]

© K. Cuthbertson and D. Nitzsche Figure 19.4 : Evolution of Palm’s share price £ 18 £ 36 £ 9

© K. Cuthbertson and D. Nitzsche Figure 19.5 : Evolution of ‘baseline’ valuation Time 0123

© K. Cuthbertson and D. Nitzsche Figure 19.6 : Valuation : option to expand Time 0123

© K. Cuthbertson and D. Nitzsche Figure 19.7 : Valuation : contraction option Time 0123

© K. Cuthbertson and D. Nitzsche Figure 19.8 : Valuation : American abandonment option Time 0123

© K. Cuthbertson and D. Nitzsche Figure 19.9 : Valuation : investment default option Time 0123

© K. Cuthbertson and D. Nitzsche Figure : Valuation : default on the debt repayment Time 0123

© K. Cuthbertson and D. Nitzsche Figure : Valuation : default on investment and debt repayment Time 0123