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1、CITICTOWERII:TherealoptionCaseStudyTeam:UnaffordableHouseProf.MichaelSchonbergerChaoShenHuilianLiTianyuDongTianjiaoZhengZhouMa7I.TheadvantageofoptionIfthecompanyCPLinvestedearlydirectly,thereismoreriskintheinvestment.Inotherword,themarketisnotalwaysstableand
2、accuratepredicted,soearlyinvestmenthashighlyuncertainty.Ifthecompanyusetheoption,theycanshortentheinvestmentperiodwhichtheyactuallyputmoneyintheproject.Certainextent,theoptioncanreducetherisk.Optionsareaverygoodinvestmentriskcontroltools.Theexpensesintheopti
3、onsaredeterminedinadvance.Inanycase,traderscannotlosemorethantheinitialcapital.Thecompanycanusetheoptiontoembedleverage,touseofsmallfundsleveragingbigbusiness,andtoimprovetheutilizationefficiencyoffunds.II.ProjectRevaluationBecausetheprojectwillcontainacallo
4、ption,thepresentvalueoftheprojectshouldberevaluated.Likeanalyzingthebondembeddedacalloption,weneedtoestimatethevalueofthecalloptionembeddedintheCPLprojectusinganadjustedNPVmethodtore-accesstheproject.1)CalloptionvalueAccordingtothebinomialtreemethod,wegotthe
5、volatilityoftotalreturn(SeeninExhibit1.)andcalculatetheu,d,puandpdaccordingtothefollowingformula.WeassumethecontractwillsigninJuly2000.(SeeninTable1.)Table1.Relativefactortocalculatetheoptionprice7AverageReturn3.51%SD15.28%Volatility30.57%ExercisePriceCostof
6、RealEstate1.6billionHKDSpotPricePVofRealEstate1.54billionHKDu=1+up%1.1652d=1/u0.8582RiskfreerateBasedonExchangeBillfreerateinHK@Jul-20013.54%Pu=(e^rt-d)/u-d0.49081Pd=1-pu0.50919Then,wegotthecalloptionpriceinJuly-2000is0.18billionHKD.(SeeninTable2.)Table2.The
7、SpotpriceandCalloptionpriceineachnode.2)AdjustedNPV7Though,CPLgotanegativePVoftheproject,afteraddtheintrinsicvalueofthecalloption.WegotanewadjustedNPV=0.12billionHKDandreturnoninvestingtheprojectis7.5%=0.12billionHKD/1.60billionHKD(SeeninTable3.)Comparedwith
8、theaveragereturn,the7.5%returnisbetterthantheaveragelevel.Table3.AdjustedNPVandReturnonInvestment+Valueofcalloption0.18+Presentvalue1.54TotalPresentValue1.72-CostofRealEstate1.6AdjustedNPV0.12Re
