In this session, we moved on with an examination of option pricing models, and used real options to examine why the rights to nonviable technology can be valuable and why the values of natural resource companies are affected by both the level and variability of commodity prices . As a cautionary note, you are pushing option pricing models to breaking point when using them to value these options, but the key takeaway is that even if you do not value the options explicitly, understanding that they exist can alter how you behave as a business. It is also true that the information that you will need to value many real options will be accessible only if you work at the pharmaceutical or natural resource company, and consequently, you cannot apply it to your company (project), since you will not have that access. During the course of the class, there were a couple of places where I was guilty of not being as clear as I should have been. One was when we discussed why I used guarantor’s pretax cost of debt in my present value calculation for Biogen’s license fee. Let me break down my rationale into multiple parts:
I use guarantor’s cost of debt, since the guarantor is the one that has contractually agreed to pay the license fee and the risk is that they will not (if they default).
I use the pretax cost of debt, since there is no tax advantage that Biogen gets from the guarantor using debt. Using an aftertax cost of debt would have inflated the value of the license fee for a tax benefit that Biogen would not be getting.
I also looked at undeveloped reserves as options, and why using discounted cash flow valuations may under value commodity companies, as well as the value of the option to abandon investments and projects.

Slides: https://pages.stern.nyu.edu/~adamodar...
Postclass test: https://www.stern.nyu.edu/~adamodar/p...
Postclass test solution: https://www.stern.nyu.edu/~adamodar/p...