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Options Value in R&DOptions Value in R&D
Gregory L. Hamm, PhDGreg Hamm and Associates
933 Taylor AvenueAlameda, CA 94501
Phone: 510-918-2016email: [email protected]
Greg Hamm and Associates 2
Definitions of options varyDefinitions of options vary
Presented in white paper - Technologies that do not enter under the most likely scenario, but may enter under others
Common - Something you can do Finance (call) - Right but not the obligation to buy
a security at a fixed price on a future date Real Options Valuation - Flexibility to adopt
future actions after learning
Greg Hamm and Associates 3
The practice of Real Options Valuation has a The practice of Real Options Valuation has a common set of activitiescommon set of activities
Identify uncertainty (volatility of underlying asset(s) or other expression)
Define the learning process Define the flexibility available Calculate outcomes Price the outcomes (replicating portfolio, risk
neutral probabilities, discount rates) Calculate expected value
Greg Hamm and Associates 4
The white paper suggests an expected value The white paper suggests an expected value approach that differs from current practiceapproach that differs from current practice
Current DOE practice implied by white paper - Value the new technology under a most likely scenario
Options analysis – Define multiple possible scenarios (should be mutually
exclusive and collectively exhaustive)– Assume an option on technology adoption
• Favorable future, adopt• Unfavorable future, do not adopt
– Calculate the expected value over the scenarios
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Transition to this approach may face many Transition to this approach may face many difficultiesdifficulties
Identifying appropriate scenarios Assigning probabilities to scenarios Assuring credible and unbiased scenarios and
probabilities Conflicts between probability and policy New skills for evaluators
Greg Hamm and Associates 6
Adopting a broad view of options would have Adopting a broad view of options would have significant valuesignificant value
Valuation is not separable from strategy. Strategy formulation should include a search for options. Undiscovered options are not valued or acted upon
Markets provide useful information on value