1 / 22

Investment Management

Investment Management. Impact on performance managers. Presenter: Mark Heath B.Bus CPA MAIPM Office: 02 9570 3160 Mobile: 0402 285 967 Email: m.heath@mbh.com.u. Strategic value. How much is it worth?. Option Pricing. Strategic value. Future Options. =. =. Management options. Hold?.

tate-ball
Download Presentation

Investment Management

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. Investment Management Impact on performance managers Presenter: Mark Heath B.Bus CPA MAIPM Office: 02 9570 3160 Mobile: 0402 285 967 Email: m.heath@mbh.com.u

  2. Strategic value How much is it worth? Option Pricing Strategic value Future Options = =

  3. Management options Hold? Maintain current project / business Sell? Abandon project / business Buy? Invest in project / business

  4. Valuation methods NPV Good for non-strategic decisions Payback Complete waste of time Option Pricing Only method that values all 3 options

  5. Financial options Hold? In the money call option Sell? Put option Buy? Call option (American with dividends)

  6. Implementing option pricing Stage gate financing Value 3 options Track 3 options

  7. 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

  8. Information required • Asset price or share price • Exercise price • Standard deviation of forecast • Amount of time till next stage gate • Risk free rate of return

  9. Define value / cost drivers Estimate discount rate Estimate project costs Net present value analysis

  10. Carry out sensitivity analysis Track value / cost drivers Track project costs Utilise NPV analysis

  11. Best and worst case Probabilities of each case Monte Carlo simulation Sensitivity Analysis

  12. Mean NPV Std. Dev. Upper and lower limits Monte Carlo Simulation

  13. Option pricing – information at hand • PV of cash flows = Asset value or share price • Initial Investment = Exercise Price • Monte Carlo Simulation = Standard deviation • Time till next stage gate = time till exercise of option • 90 bank bill rate = Risk free rate

  14. Option pricing methods • Easy to use • More accurate • Won’t value America put options • Won’t value American call with dividends Black - Scholes • Not as accurate unless using weekly periods • Can be used for all option types • Uses decision tree analysis • Sets up benefits tracking model Binomial method

  15. Binomial Method • Needed for abandon and hold options because of dividends and early exercise • Decision tree analysis with option pricing theory • Start at end of project’s life and work backwards

  16. Binomial method Now Year 1 Year 2 Ex = Cost of investment in project A = base case NPV d = % change in NPV of downside event u = % change in NPV of upside event B = A x d , C = A x u, E = B x d, F = B x u, G = C x d, H = C x u Option value at E – H (opt 2yr) = Letter – Ex Probability of upside event (P) = (rf – d)/ (u-d) Option value at C = (P x H + (1-P) x G)/ (1+rf)t

  17. British Telecom – 3G investment • Exercise Price = 1bn • 10bn initial investment to get option • PV of future cash flows = 6bn • NPV = -5bn • Standard deviation = 150% • Risk free rate = .04 • Time to exercise = 5 years • Value of option = 5.2bn

  18. Tangible v intangible assets

  19. NAB investment in Homeside • $A 2.2bn Investment • Income stream of avg $A170m / year • PV of income stream $A2.2bn • Value of options into US allows for positive NPV • Revaluation of MSR’s through derivatives trading causes losses

  20. Revaluation of MSR’s

  21. HIH investment in FAI • Cost of Investment = $320m • Base case NPV = -$16m • NPV range = -$85m and $18m • Call option value = $13m • Put option value = $30m • First decision tree point puts NPV @ -$105m

  22. Implications for the performance manager • Benefits management is as important as other job functions • Binomial method and decision tree analysis provides framework • Should be embedded in weekly reporting

More Related