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FINC420 (Finance (Derivatives - price derived from value of another asset,…

- - - - real options - options on physical assets - see what happens them make decision
        
        Black-Scholes method
        
        equating project to a option
        
        volatility of asset value = volatility of stock value
        
        PV of cost of investment = strike price (x)
        
        PV of investment cash flows = strike price (S)
        
        sunk cost of obtaining the right e.g. tech, human resource so are able to exercise the option = premium
        
        available decision period = time to expiration
        
        risk free rate
        
        cash flow missed while holding option = Dividends lost while holding option
        
        decision tree method - uses DCF & expected value
        
        monte carlo
        
        option to expand (call)
        
        option to wait (call)
        
        option to vary - inputs, outputs, processes
        
        option to abandon (put)
      - traditional investment - make decision & see what happens
        
        DCF
        
        terminal value
        
        growth = reinvestment /net income x return on capital (analoguous to growth calc for DDM)
        
        WACC - changes if D/E changes
        
        Beta from unleveraging other firms asset beta
        
        weighting of CFs from various scenarios
    - - High development cost
      - Long development & production time time
      - Technology - easy accessed reserves gone
      - geopolitical
      - environmental
      - scale may be beneficial or detrimental?
    - - Central
        
        easier fund raising, better control of subsidiary, quicker mobilisation
        
        firms 'overcashed' - provides flexibility & ability to raise debt quick
      - project
        
        less exposure, ring fencing of remaining risk, debt leveraging
        
        harder to raise finance & institutions require more collatoral
  - - - Adaption
      - Mitigation
        
        unburnable reserves
        
        stranded assets?
        
        Not issue bec. beyond horizon of valuation?
        
        higher WACC/CoE
        
        lower LT growth
        
        NAV assets at risk
        
        carbon pricing
        
        ETS
        
        Pros - less deadweight loss, encourages abatement at lowest cost
        
        Faults - poor execution = low caps, not auctioning allowances
        
        cap - hard or soft, cap & trade or,surrender, imported credits allowed/disalllowed
        
        NZ - forestry in, no agriculture (50% of emissions),, imports allowed, more allowances than emissions!, 2 for 1 grandfathering
        
        improvements - higher cap & price collar, no importation, more auctioning
        
        carbon taxes
        
        simpler, clearer results
        
        RES incentives
        
        subsidies
        
        Feed in tariffs
      - Costs to developed or developing world?
  - - - Solar
      - Wind
      - incentives to replace aging energy infrastructure with RES
      - corporate R&D more than VC
  - - - lack of large enough substitutes
      - fiduciary duty does not prevent SRI
    - - ETFs
    - - diversification - eliminates non-systemic risk
        
        required return (CAPM)
  - - - hedging
        
        value on arbitrage
        
        derivatives
        
        options
        
        less common
        
        futures
        
        more common
        
        forward curve
        
        temperature markets have seasonal pricing - head & shoulders
        
        contango - price trends upward with maturity/ Backwardation - price trends down with maturity
    - - Fundamental analysis
        
        quantitative
        
        business analysis incl financial statements
        
        forecasts
        
        valuation
        
        absolute
        
        2 more items...
        
        relative
        
        1 more item...
        
        sum of parts if firm is conglomerate
        
        Income statement
        
        revenue
        
        2 more items...
        
        costs
        
        1 more item...
        
        Balance sheet
        
        fr. income statment - retained earnings
        
        fr. capital budgeting (PPE)
        
        1 more item...
        
        revenue related accurals (a/payable, receivables)
        
        expenses O&G - full cost or successful efforts exploration costs
        
        qualitative
        
        Industry & competitive analysis
        
        PESTEL influences
        
        Life cycle stage
        
        Porter's industry 5 forces
        
        barriers to entry
        
        concentration
        
        firm capabilities & competitive advantage
        
        Porter's 3 competitive strategies
        
        Management ability
        
        intrinsic value
        
        growth
  - - - american - during period v european on date
      - Call = right to buy
      - Put = right to sell
      - in/at/out of the money
      - collar = call + put
    - - futures
        
        exchange, cash settlement, daily settlement, exchange guaranteed, speculation = unlimited downside/upside
        
        close out by taking equal & opposite position
      - forwards
        
        OTC, goods settlement, maturity settlement , credit risk
    - - hedgers - physical interest
        
        For risk hedging - bec exposure to price and other market risk
        
        less volatility = 'locked in' cash flows
        
        lose upside opportunity & downside risk
        
        identify asset price risk
        
        take future position which makes money when asset does not
      - investors/speculators - no phyiscal interest
        
        windfall/arbitrage/ diversification
      - exchange - middle man
        
        liquidity, price discovery, credit guarantee
    - - margin call - top up margin account or have assets sold off
      - liquidity - high trading level
      - open interest - no of open contracts on a day
    - - quality risk (diff in products)
      - calender risk (diff in delivery)
      - locational risk (diff betw delivery hedging locations)
- - - - general
        
        increase from population growth
        
        increase from GDP increase
      - transportation
        
        decrease by efficiency improvements
        
        increase from activity increase
        
        air transport
        
        electric vehicle uptake strong upto 2025
      - industry
        
        increases
      - buildings
        
        static
    - - General
        
        Large increase 30 - 60% by 2050
        
        population growth
        
        development
  - - - coal
        
        decrease
      - gas
        
        increase
        
        Less price uncertainty
        
        Increase would be driven by substitution from high oil prices
      - oil
        
        static
        
        Greater price uncertainty
        
        prices lower if technology improves
    - - expand with regulatory support
  - - - decreases from efficiency improvements
        
        energy intensity decreases
      - increase from consumption increases
- - - - global market - tanker & pipeline
      - downward trend in sales growth, ROCE
    - - regional market transitioning to global - pipeline and LNG tankers
    - - regional - transportation costs
  - - - grid parity
        
        onshore wind already had GP
      - small proportion of generation (<5%) but v strong growth predicted
  - - - battle for dominance between types of RES
    - - smart grid
        
        hybrid smart grid - central + decentralised gen
        
        super smart grid - supranational grid
        
        distributed - microgrids and local distribution
        
        energy & data combos
      - distributed generation
    - - stranded assets (80% coal, 50% gas, 30% oil)
- - - - deregulation - electricity
    - - Supply - geopolitical risk
      - Stability - price spikes, interruptions
    - - Climate change - emissions
        
        transition to RES
        
        international treaties
        
        Kyoto
        
        Paris
        
        emissions trading
        
        CDMs in foreign developing countries
        
        JIs w foreign developed countires
    - - fuel poverty
      - access to electricity