![]() Here are some answers to questions you may have about what comes next for the bank and for depositors’ money. ![]() Volatility change is a typical feature of real investment projects, where the riskiness of cash flow generated by the project can change significantly during the project life span. A significant implication of this finding is that management decision making will be better off considering these embedded options in their field-development and capital-investment choices. First Republic is the second-largest bank by assets to fail in U.S. This paper aims at the valuation of real options with changing volatility. In contrast, the abandonment option exhibited only a marginal change with respect to the DCF value. ![]() The results indicate that the DCF values lag those of the option values for the deferral and expansion options. The binomial lattice and later the Black and Scholes models are used to model the options because of the flexibility they provide in incorporating early exercise. We develop a valuation model for the traditional DCF and real options and specifically model the flexibility in the options to delay, abandon, or expand the field anytime during the relinquishment requirement period considering these multiple uncertainties. Real options valuation (ROV) considers the managerial flexibility to make ongoing decisions regarding implementation of investment projects and deployment. Hence, we assess if the valuation differs if valued by the traditional DCF approach compared with ROA. Simulations and real options are not so much competing approaches for risk assessment, as they are complementary. As such, using traditional discounted-cash-flow (DCF) methodologies such as the net present value (NPV) might not adequately value the embedded options that these uncertainties create, leading to a rejection of the investment decision. Marginal fields can prove uneconomic when developed under prevailing circumstances such as technical (reservoir size, infrastructure distance and remoteness, crude-oil type) or commercial issues (oil prices, high cost of development, lack of third-party-access arrangements), among others. This paper shows the applicability and the value of real options analysis (ROA) in valuing a marginal undeveloped discovery in the UK Continental Shelf (UKCS) under multiple project uncertainties, namely geology, costs, and oil prices.
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