re : pre - submitted question on espeak erin ,
a book by martha amram and nalin kulatilaka is an excellent
non - technical introduction to real options and it contains all the most
important
references to more advanced books and papers .
the book has an endorsement by jeff skilling on the cover page .
the research group offered several one - day seminars on real options
and applications to the energy industry . we still have a few binders with
the presentation materials available if you are interested .
we plan to repeat the seminar sometimes in the fall .
the first part of the seminar ( about 4 hours in the morning ) covers general
concept of real options
and their applicability to the energy business .
the second , more technical afternoon session , covers stochastic processes used
to model price uncertainty in the energy markets and specific case
studies ( valuation of natural gas storage facilities and of peaking gas - fired
power plants ) .
the real options approach has been developed specifically to address the
problem of making
investment decisions under uncertainty . nobody in this field claims that this
is a
perfect tool , but it represents a significant progress compared to other
techniques developed
earlier .
discounted cash flow analysis that tries to incorporate uncertainty through
analysis of several , in most cases , arbitrary scenarios ( most likely ,
optimistic ,
pessimistic ) . these scenarios don ' t identify explicitly the risk drivers
and don ' t specify the future proactive management decisions .
the real , option approach is very powerful because it allows to ( 1 ) capture
uncertainty in an explicit way and ( 2 ) to design investment projects that
allow to exploit future positive developments and reduce future exposures to
downside risk .
this approach allows also create a link between investment decisions and
future
operational decisions . forward - looking investment decisions create options
that are exercised
in the future through active management of a project .
the real options technology relies heavily on advanced statistical tools to
come
up with the representation of future possible states of the world . the real
challenge is
to use these tools in a sensible way . i have seen in my career ( almost 30
years
of applying mathematical tools to business and economic problems ) many quants
armed with
powerful computers who reminded me of monkeys armed with hammers . the
challenge is not
to run mechanically thousands of simulations based on arbitrary assumptions
but to translate in a creative way the insights of people who understand
specific businesses
into parsimonious quantitative models . it is especially critical to
stress - test the assumptions
of any model and to ask the question if the outcome of a model depends
critically on any set of assumptions .
if this is the case one should use common sense to examine the underlying
assumptions .
i remember that in the early eighties quite a few models simulated the
dynamics of oil prices ,
but all the stochastic scenarios represented fluctuations around a very
optimistic upward trend .
one would have been better off stepping back and asking a simple question
what economics 101
teaches about cartels and the dynamics of supply and demand .
enron north america corp .
from : erin rice @ enron 06 / 27 / 2000 03 : 52 pm
to : vince j kaminski / hou / ect @ ect
cc :
subject : pre - submitted question on espeak
good news ! there is already a question waiting for your july 12 espeak
session . i have pasted it below , although you don ' t have to respond until
the actual event . don ' t forget to send a bulleted list of discussion topics
if you would still like us to advertise the event on the elevator screens .
thanks .
- er
submitted by breineck
i was doing some reading about the application of real options in the
evaluation of non - financial assets . would you recommend any texts or articles
for a
more in - depth study of this area ? is quantification of risk or uncertainty
the major challenge in using this concept ? can statistical tools be used with
this to do
a sort of sensitivity analysis ?
re : pre - submitted question on espeak
erin ,
a book by martha amram and nalin kulatilaka is an excellent
non - technical introduction to real options and it contains all the most
important
references to more advanced books and papers .
the book has an endorsement by jeff skilling on the cover page .
the research group offered several one - day seminars on real options
and applications to the energy industry . we still have a few binders with
the presentation materials available if you are interested .
we plan to repeat the seminar sometimes in the fall .
the first part of the seminar ( about 4 hours in the morning ) covers general
concept of real options
and their applicability to the energy business .
the second , more technical afternoon session , covers stochastic processes used
to model price uncertainty in the energy markets and specific case
studies ( valuation of natural gas storage facilities and of peaking gas - fired
power plants ) .
the real options approach has been developed specifically to address the
problem of making
investment decisions under uncertainty . nobody in this field claims that this
is a
perfect tool , but it represents a significant progress compared to other
techniques developed
earlier .
discounted cash flow analysis that tries to incorporate uncertainty through
analysis of several , in most cases , arbitrary scenarios ( most likely ,
optimistic ,
pessimistic ) . these scenarios don ' t identify explicitly the risk drivers
and don ' t specify the future proactive management decisions .
the real , option approach is very powerful because it allows to ( 1 ) capture
uncertainty in an explicit way and ( 2 ) to design investment projects that
allow to exploit future positive developments and reduce future exposures to
downside risk .
this approach allows also create a link between investment decisions and
future
operational decisions . forward - looking investment decisions create options
that are exercised
in the future through active management of a project .
the real options technology relies heavily on advanced statistical tools to
come
up with the representation of future possible states of the world . the real
challenge is
to use these tools in a sensible way . i have seen in my career ( almost 30
years
of applying mathematical tools to business and economic problems ) many quants
armed with
powerful computers who reminded me of monkeys armed with hammers . the
challenge is not
to run mechanically thousands of simulations based on arbitrary assumptions
but to translate in a creative way the insights of people who understand
specific businesses
into parsimonious quantitative models . it is especially critical to
stress - test the assumptions
of any model and to ask the question if the outcome of a model depends
critically on any set of assumptions .
if this is the case one should use common sense to examine the underlying
assumptions .
i remember that in the early eighties quite a few models simulated the
dynamics of oil prices ,
but all the stochastic scenarios represented fluctuations around a very
optimistic upward trend .
one would have been better off stepping back and asking a simple question
what economics 101
teaches about cartels and the dynamics of supply and demand .
enron north america corp .
from : erin rice @ enron 06 / 27 / 2000 03 : 52 pm
to : vince j kaminski / hou / ect @ ect
cc :
subject : pre - submitted question on espeak
good news ! there is already a question waiting for your july 12 espeak
session . i have pasted it below , although you don ' t have to respond until
the actual event . don ' t forget to send a bulleted list of discussion topics
if you would still like us to advertise the event on the elevator screens .
thanks .
- er
submitted by breineck
i was doing some reading about the application of real options in the
evaluation of non - financial assets . would you recommend any texts or articles
for a
more in - depth study of this area ? is quantification of risk or uncertainty
the major challenge in using this concept ? can statistical tools be used with
this to do
a sort of sensitivity analysis ?