1 / 19

Option pricing

Option pricing. AIPM conference 2003. Why do we run projects?. To improve our competitiveness. What is competitive advantage?. The reasons why a customer uses you and not someone else. What makes up competitive advantage – an example. Yes – increases overall advantage.

bendek
Download Presentation

Option pricing

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Option pricing AIPM conference 2003

  2. Why do we run projects? To improve our competitiveness

  3. What is competitive advantage? The reasons why a customer uses you and not someone else

  4. What makes up competitive advantage – an example

  5. Yes – increases overall advantage

  6. A sporting analogy – 100 metre sprint Red is fastest out of the blocks Yet blue wins every time

  7. Competitive advantage Red can invest in being even faster out of the blocks Or Invest in improving latter half of race Or Both

  8. Strategic project “x” Vision achieved after project z After project y Significantly positive NPV project Finish to Start dependency After project x Negative NPV project Did not know of y or z when x was born Now

  9. Project Life Cycle PLAN ACCOMPLISH SOFT HARD PHASE 1 CONCEPT PHASE 2 DEVELOPMENT PHASE 3 IMPLEMENTATION PHASE 4 TERMINATION LEVEL OF EFFORT TIME

  10. Variability of Objectives Concept +- 70% +- 50% Feasibility +- 20% Development Managed through change control Implementation 0 + follow on options Benefits realisation

  11. Stage Gate Finance PLAN ACCOMPLISH SOFT HARD PHASE 1 CONCEPT PHASE 2 DEVELOPMENT PHASE 3 IMPLEMENTATION PHASE 4 TERMINATION Increasing probability of success Change Control Benefits Realisation Scope of Work Business Case Positional Paper TIME

  12. Issues with picking the right portfolio • Forecast error • Short term EPS reductions • Lack of vision • Lack of strategic planning

  13. A resolution to issue 1 • Option pricing on real assets • Allows for more agility • Run more projects in concept phase • Allows for investing in negative NPV projects

  14. Management options Hold? Postpone current project / maintain business as usual Sell? Abandon project / business Buy? Invest in project / business

  15. Financial options Hold? In the money call option/out of the money call option Sell? Put option Buy? Call option (American with dividends)

  16. Sample scenario – a strategic programme • 0 forecast error • Present value of cash inflows = $120m • Present value of cash outflows = $150m • Should programme be approved?

  17. Some changes in assumptions • 70% variability on forecast • Run a pilot for $10m to test the waters • Pilot will run for 12 months • All other data is the same • Should we run the project?

  18. Benefits of options pricing • Links value to competitive advantage • Allows for informed decision making • Removes a large portion of the gut feel • Tests the validity of strategy

  19. Impact on project managers • Must include benefits management in scope of projects • Model must be updated monthly • Communicate results to sponsor • Focus more time on movement in project objectives

More Related