MSc in Engineering Management

## Course Information Package

Course Unit Title | SUSTAINABLE BUILT ENVIRONMENT | ||||||||

Course Unit Code | MEM519 | ||||||||

Course Unit Details | MSc Engineering Management (Electives Courses) - | ||||||||

Number of ECTS credits allocated | 7 | ||||||||

Learning Outcomes of the course unit | By the end of the course, the students should be able to:- Explain the theoretical foundations of the real options approach.
- Identify and describe the different types of managerial investment and operational flexibility options.
- Implement analytic solutions for the evaluation of different investment strategies with options involved.
- Build scenario trees and simulations to evaluate complex multi-stage investment decisions under uncertainty in one or many dimensions.
- Find the optimal timing of strategies of implementing investment options or switching to alternative strategies.
- Apply the methodologies in challenging cases in engineering and new technologies.
- Explain important recent developments in real option analysis.
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Mode of Delivery | Face-to-face | ||||||||

Prerequisites | MEM501 | Co-requisites | NONE | ||||||

Recommended optional program components | Readings: The students are expected to read and review 4-5 papers from relevant scientific and business journals. | ||||||||

Course Contents | Part 1: Categorization of real options Investment options and operational flexibility options with examples from various industries. Part 2: Theoretical foundations Stochastic modelling assumptions and Ito’s Lemma. Derivation of option partial differential equation through replication or equilibrium model CAPM. Risk neutral valuation of real options. Part3: Analytic solutions in one dimension The option to defer. The option to abandon. Sensitivities of option formulas. Dynamic parameters Part 4: Numerical lattice valuation of simple options The Cox-Ross-Rubinstein binomial model. Pricing simple options with/without optimal timing. Deriving the optimal investment trigger boundary. Part 5: Sequential options in one dimension Compound and growth options using the binomial lattice. Analytic compound options solutions. Interactions between sequential options. Part 6: Multi-dimensional options Options to exchange one asset for another. Options on the maximum or minimum of 2 stochastic variables. Analytic solutions and two dimensional lattice implementation. Reduction of dimensionality. Part 7: Monte Carlo simulation option valuation using Excel in one and many dimensions Evaluation of simple call and put, evaluation of options on the maximum or minimum and options to exchange one asset for another. Part 8: Applications with portfolios of real options Backwards dynamic programming solutions on binomial trees when many options are involved. Applications to real cases in automobile manufacturing plant, energy, pharmaceutical R&D, telecommunications and technology. Part 9: Other issues in real options analysis Path-dependency and the general switching model. Options with jump-to-ruin risk. Research and development and learning options. Valuation of firm’s equity with option to invest and default. | ||||||||

Recommended and/or required reading: | |||||||||

Textbooks | - Lenos Trigeorgis, Real Options: Managerial Flexibility and Strategy in Resource Allocation, The MIT press, 1996. ISBN10: 026220102X
- Spiros Martzoukos and Lenos Trigeorgis, Real Options Analytic Foundations, Cambridge University Press (Forthcoming).
- Avinash Dixit and Robert Pindyck, Investment Under Uncertainty, Princeton University Press, 1994. ISBN-10: 0691034109
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References | - Martha Amram and Nalin Kulatilaka, Real Options: Managing Strategic Investment in an Uncertain World, Harvard Business School Press, 1999. ISBN-10: 0875848451
- Tom Copeland and Vladimir Antikarov, Real Options: A Practitioner’s Guide, Texere, 2001
- Eduardo Schwartz and Lenos Trigeorgis (eds), Real Options and Investments Under Uncertainty: Classical Readings and Recent Contributions, The MIT Press, 2001.ISBN: 0262693186
- David Shimko, Continuous Time Finance: A Primer, Blackwell Pub, 1994. ISBN-10: 1878975072
- John Hull, Options, Futures and Other Derivatives, 6th edition, 2006, Pearson-Prentice Hall. ISBN 0131499084
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Planned learning activities and teaching methods | The course is delivered through three hours of lectures per week. Lectures also include in-class exercises to enhance the material learning process. The course also includes coursework involving computer exercises in Microsoft Excel and Visual Basic for Applications in Excel. The course material (notes, exercises, forum, etc) is maintained on the university’s e-learning platform | ||||||||

Assessment methods and criteria |
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Language of instruction | English | ||||||||

Work placement(s) | NO |