1. © K. Cuthbertson and D. Nitzsche Figures for Chapter 19 REAL OPTIONS (Financial Engineering : Derivatives and Risk Management)

2. © K. Cuthbertson and D. Nitzsche Figure 19.1 : Truncated payoffs from an option The outcomes in the shaded area are not realised because you can always ‘walk away’ and not exercise the option. The lower bound for the payoff from a real call option is the additional investment cost (of expansion).

3. © K. Cuthbertson and D. Nitzsche Figure 19.2 : Drivers of NPV and real options NPV PV {Expected cash flows} PV {Fixed costs} RO PV {Expected cash flows} PV {Fixed costs} Interest rate Value lost over option’s life Cash flow volatility Time to maturity NPV Real Options

4. © K. Cuthbertson and D. Nitzsche Figure 19.3 : One-period BOPM S SuSu SdSd q 1 - q C C u = max[0,S u - K] C d = max[0,S d - K]

5. © K. Cuthbertson and D. Nitzsche Figure 19.4 : Evolution of Palm’s share price £ 18 £ 36 £ 9

6. © K. Cuthbertson and D. Nitzsche Figure 19.5 : Evolution of ‘baseline’ valuation 90 45.1 179.4 357.7 90 22.6 713.2 179.4 45.1 11.4 Time 0123

7. © K. Cuthbertson and D. Nitzsche Figure 19.6 : Valuation : option to expand 113.4 50.7 236.6 493.9 105.7 22.6 1024.8 224.1 45.1 11.4 Time 0123

8. © K. Cuthbertson and D. Nitzsche Figure 19.7 : Valuation : contraction option 48.8 10.3 121.4 Time 0123

9. © K. Cuthbertson and D. Nitzsche Figure 19.8 : Valuation : American abandonment option 107.1 70.6 184.7 357.7 98.9 60 713.2 179.4 60.0 Time 0123

10. © K. Cuthbertson and D. Nitzsche Figure 19.9 : Valuation : investment default option 42.6 0 121.4 Time 0123

11. © K. Cuthbertson and D. Nitzsche Figure 19.10 : Valuation : default on the debt repayment 46.5 10.9 113.8 271.3 31.0 0 622.2 88.3 0 0 Time 0123

12. © K. Cuthbertson and D. Nitzsche Figure 19.11 : Valuation : default on investment and debt repayment 19.6 0 55.8 271.3 31.0 0 622.1 88.3 0 0 Time 0123