Journal of Real Options and Strategy
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Volume 5 , Issue 1
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Theoretical Papaer
  • Takafumi Hirose, Hajime Miyauchi, Tetsuya Misawa
    Volume 5 (2012) Issue 1 Pages 1-18
    Released: March 01, 2012
    JOURNALS FREE ACCESS
    Deregulation of electric power utilities are processing in the world. As the uncertainties of the business environment are increasing, return for asset investment is also uncertain. Therefore, the electric utilities should evaluate the appropriate value of the capital investment. When only the execution of the project is observed, we have proposed a risk assessment method for generation investment by the probit model (RNPV probit model) which simplifies the evaluation method by the net present value based on utility indifference pricing. In this paper, RNPV probit model is applied to asset evaluation of thermal power plant considering the option to abandon, a kind of real option.
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Application
  • Haruyoshi Ito, Akihiko Ozawa
    Volume 5 (2012) Issue 1 Pages 19-46
    Released: March 01, 2012
    JOURNALS FREE ACCESS
    We analyzed the efficiency of the so-called ‘day-counting weather derivatives’ provided by the insurance firms in Japan for J Clubs, professional soccer teams in Japan. These weather derivatives in Japan are not traded in the market but provided by insurance firms. First of all we showed how J clubs are exposed to adverse weather conditions using regression analysis. Second, we evaluate the premium of two types of proposed weather derivatives by Wang transforms since we need to consider the incompleteness of the market. Finally, we performed valuation analysis showing how soccer teams improve their corporate value using weather derivatives given insurance premium and preference of the mangers. The OLS regression showed that the number of attendance on the rain day is significantly less than the sunny day for many teams. Also valuation analysis implies that premium offered by insurance firms is too high to improve firm value. If the risk loading of weather derivatives had been as low as 25%, the weather derivatives would have been used by fairly risk adverse managers extensively.
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