Presentation is loading. Please wait.

Presentation is loading. Please wait.

Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 1 1 Real Options: A Tool for Surge Decisions?* International Conference.

Similar presentations


Presentation on theme: "Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 1 1 Real Options: A Tool for Surge Decisions?* International Conference."— Presentation transcript:

1 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 1 1 Real Options: A Tool for Surge Decisions?* International Conference on Operations Research Mastering Complexity, Munich 2010 Peter T. Baltes / Beat Suter, Swiss Military Academy at ETH Zurich year 0 year 1 year 2 1 * For their kind help the authors thank: Werner Epper, Walter Furter, Odilo Gwerder, Thomas Kuhn, Daniel Lätsch, Thomas Schaffner, Thomas Schlittler and Maximilian Zangger

2 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 2 A simple military showcase Situation and surge Session Outline Applicability and historical experiences Wrap-up and further research Why Real Options valuation

3 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 3 Swiss situation – and solution End of Cold War: Peaceful and stable situation in Europe Reduction of army size: Surge Cores which know but cant Surge Mobilization Surge Evolution or continuous build-up © ©

4 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 4 Why Real Options Valuation – and how? Expenses for armed forces as investment in security Use of financial investment valuation methods Net present Value (NPV)? Surge as an optional investment in security Flexibility of investment Real Options But… NPV does not account for flexible response to changing security environment Arbitration calculation between core units with surge option versus full grown army

5 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 5 A military showcase Scenario White Block Scenario Black Block Protection of a conference – go in big or small? Probability pProbability 1-p

6 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 6 Parameters of the scenarios Two threat scenarios and four defense (level) strategies Stable situation after first day (of two) A military showcase No adaption costs Insufficient defense is costly (just d instead of normal 1 gain) Protection of a conference – go in big or small?

7 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 7 Risky and cheap Safe and expensive Flexible Fixed A military show case Protection of a conference – whats the actual price of flexibility? Strategy 3 Surge Strategy 4 Demobilization Strategy 1 Play it safe Strategy 2 Daring the gap

8 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 8 A military show case Strategy 1 – Play it safe Expected Value = p ·(1-k+1-k)+(1-p)·(1-k+1-k) p k k 1 1 day 0 1-p k k 1 1 day 1 day 2

9 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 9 A military show case Strategy 3 – (Conditional) Surge Expected Value = p ·(1-k/2+1-k/2)+(1-p)·(d-k/2+1-k) p k/ p k/2 k 1 d day 0day 1 day 2

10 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 10 A most basic model - solved p: Probability for scenario White Block d: Gain in case of insufficient protection (having small army in case of Black Block, instead of gain 1 for sufficient protection) k: Costs of large army, normalized to 1. k/2: Costs of small army, half of large army When to prefer the surge to demobilisation?

11 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 11 A graphical solution – p fixed Surge p: Probability for scenario White Block d: Gain in case of insufficient protection (having small army in case of Black Block) k: Costs of large army k/2: Costs of small army (half of large army) Demobilization

12 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 12 Surge is preferred, in case of… low costs or casualties in case of failure expected peaceful development Summarized verbally high costs for provision of security and troops

13 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 13 Security situation development Will to surge Ability to surge Pitfalls and corner steps ? ? ©

14 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 14 Switzerland World War I World War II Track record of surges Korea War Foreign Countries before and during World War II Great Britain Finland Germany

15 Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 15 Next steps and further research Scenario calculations and parameter estimation Various input parameters Modeling feature and depth variation Cost-benefit calculation for case of surge without subsequent war Comparison with alternative modeling techniques Calculations with different risk discount factors Monte Carlo modeling Real Option values and structures flexible decision Real Options for different markets Investment Capital market arbitrage Security Comparative advantage arbitrage?


Download ppt "Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich 1 1 Real Options: A Tool for Surge Decisions?* International Conference."

Similar presentations


Ads by Google