The Application Of Real Option Theory In The Highway BOT Investment

Highways are of great significance in inspiring the economic communication between areas and improving national economic structure. However, there is a constraining contradiction between the huge investment demand and the limited financial ability of government. While, in solving this problem, BOT mode has presented to be very effective and have got more and more application. To better its application, we need to learn from its practice, gather the existed problem, and improve the investment theory. Responding to this demand in reality, this paper comes out. After analysis the present practice of highway BOT investment, this paper found that investment strategies making beforehand is the vital prerequisites. But investment strategies making is limited by the defects in the traditional investment decision making methods and the ways of risk management.This paper will apply the real option method which is one of the advanced and effective research achievements into the management of highway BOT investment. First of all, build up a more effective project valuing method that quantify the flexibility factor's effect on the risk and value of the project, consider this factor into the decision making. And then, based on the new valuing method, this paper sets up the framework for the investment strategy, to initiatively look for and build up real options and systematize the application procedures.In 1st chapter, this paper will present the background from both the realistic aspect and the theoretical aspect, and also the content and the structure of this paper. In 2nd and 3rd chapter, the concept of real option and highway BOT project will be introduced. In 4th chapter, there will be the statement of the theoretical research structure, including the pricing method based on real option and the designing frame for investment strategies. In 5th chapter, an illustration will be given using the research frame built in 4th chapter, with the exhibition of the existence of abandon option for construction corporation in highway BOT project as the agreement with other participants on the equity carve-out option, the pricing of the abandon option and the demonstration of the sensitivity analysis and the analysis on optimizing parameter series. From the analysis, we found that sensitivities of option value to different parameters differ, and the change in parameter series could bring in unexpected effect on option value. The last part 6th chapter will make a summary on the main conclusions and the creative points, meanwhile, prospect in this area.