Money, finances and credit

Real options as a financial instrument to evaluate a project with a high degree of uncertainty: the specifics of application

Economic Annals-XXI

Economic Annals-ХХI: Volume 179, Issue 9-10, Pages: 105-114

Citation information:
Astanakulov, O. (2019). Real options as a financial instrument to evaluate a project with a high degree of uncertainty: the specifics of application. Economic Annals-XXI, 179(9-10), 105-114. doi: https://doi.org/10.21003/ea.V179-09

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Olim Astanakulov
PhD (Economics),
Associate Professor,
Head of Extramural Department,
Tashkent Institute of Finance
60A A. Temur Str., Tashkent, 100000, Uzbekistan
astanakulov@gmail.com
ORCID: https://orcid.org/0000-0002-0536-1214

Real options as a financial instrument to evaluate a project with a high degree of uncertainty: the specifics of application

Abstract. In conditions of instability of financial and commodity markets, the implementation of long-term projects with significant estimated payback periods involves not only long sources of financial resources, but also the use of new approaches to identify «weak signals» of the market, their systematic assessment and proactive response to changes. By itself, the possibility of a proactive response creates additional advantages for project participants (stakeholders), which, in financial and analytical practice, is usually associated with the concept of real options – the right to make management decisions in relation to the current or created asset.

Using the investment potential of real options as one of the opportunities for evaluating projects with a high degree of instability allows one to make decisions outside the framework of the classical investment methodology. The instability factor for many investors now plays a significant role, increasing both the risk on the one hand, and the possibility of a multiple increase in capitalization on the other. The «Veriton Communications Inc» (USA) example with a simple financial option that allows an exchange investor to defer a decision about whether to buy or sell shares at a predetermined price has been given to demonstrate the basic approach to the methodology.

When conducting the work, the two large medicines producing companies – «Bioten» and «Pfizer» – were analyzed, taking into account the cash-flow and the investment projects for 2018-2019. The peculiarity of the obtained results is a slight difference in Net Present Value (NPV) for different amounts of funding.

The scientific novelty of the research is revealed in the principles of evaluating the investment attractiveness of projects with different degrees of innovation, which allows determining the possibility of creating innovation through the implementation of innovative investment projects by taking into account management flexibility, optimizing the capital structure according to the criterion of minimizing its cost by using the method of real options, multipliers and reverse induction, which will help to assess investment opportunities at all stages of the process of creating and implementing innovative investment projects.

The practical significance is shown in the universal possibility of using this tool in the project at any stage for making an investment decision.

Keywords: Options; Decision-Making; Financial Tools; Evaluation of Investment Projects; Net Present Value (NPV); «Veriton Communications Inc»; «Bioten»; «Pfizer»

JEL Classification: C18; G11

Acknowledgements and Funding: The author received no direct funding for this research.

Contribution: The author contributed personally to this work.

DOI: https://doi.org/10.21003/ea.V179-09

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Received 12.09.2019
Received in revised form 29.09.2019
Accepted 6.10.2019
Available online 11.11.2019

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